The dollar’s extended slide has prompted China’s central bank to change tack in managing its currency, as it pivots from supporting the yuan to guarding against the risk of a rapid appreciation.

The People’s Bank of China fixed the yuan’s daily reference rate at a slightly weaker level than market forecasts on Monday and Tuesday, after setting it stronger for most of the past six months. The PBOC is also on track to pause bill sales in Hong Kong for a third month, the longest run since 2018, leaving liquidity ample and easing upward pressure on the yuan.

Adding to that, state-owned banks have been spotted buying dollars in the onshore market in recent weeks as they try to slow the Chinese currency’s gains, according to traders. 

The PBOC’s recent shift is the latest example of how the dollar’s descent is rippling through global financial markets, as policymakers step back from propping up their currencies and anticipate more room to ease to shore up growth. In China’s case, the authorities have to walk a fine line as a sharply weaker yuan may spur outflows, while a rapidly strengthening one could hurt exports.

“China’s domestic condition is not ready to take on significant yuan appreciation,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas SA. “We still believe the yuan will lag the basket despite the weak USD trend and de-dollarization theme.” 

Beijing’s tariff truce with Washington has bolstered China’s currency, helping it advance more than 2% versus the greenback from an 18-year low set in April. The rally has given the PBOC room to pare back its defense of the yuan.

The offshore yuan slipped 0.1% to 7.1980 per dollar on Wednesday to head for a third day of declines. This came after the PBOC set the yuan fixing at 7.1894, a slightly weaker rate for a second session.

The PBOC has refrained from issuing bills in Hong Kong, and Bloomberg’s calculation show that maturities in the three months through May unleashed 85 billion yuan of funds into the market. That helped to keep one-month funding costs on the yuan at around 1.7%, compared with as much as 4.5% in January when the PBOC offered extra bills to squeeze yuan short sellers. 

The latest economic data reinforce the need for authorities to ensure that the yuan doesn’t strengthen too quickly. China’s exports have held up well, but persistent price deflation and weak consumption highlight the need for continued policy support. 

Analysts say Chinese officials are unlikely to sit on the sidelines if the yuan starts to make rapid gains, akin to the recent moves seen in the Taiwan dollar and South Korean won. 

“Alongside the resurfacing USD selloff, the PBOC is likely to tread cautiously to avoid excessive yuan appreciation, which could weigh on China exports amid the tariffs rout,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. 

This article was generated from an automated news agency feed without modifications to text.