Yuan hits 28-month low despite fresh policy step

China's yuan touched a 28-month low against the US dollar on Monday_ only steps away from its downside trading limit_ despite the central bank taking steps to rein in the currency's weakness_ Reuters reports.

The People's Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from the current zero_ starting on Sept. 28.

The announcement_ along with another firmer-than-expected daily midpoint fixing_ was meant to slow the pace of yuan depreciation by making it more expensive to bet against the currency_ traders said.

"This could stem further forward positions that have been negative for the yuan and slow its depreciation pace_" analysts at Maybank said in a note.

Prior to market opening_ the PBOC set the midpoint rate at 7.0298 per dollar_ 378 pips or 0.54% weaker than the previous fix of 6.992 on Friday_ the weakest since July 7_ 2020.

However_ the midpoint continued to come in much stronger than market projections for the 23rd straight trading session_ traders and analysts said.

The official daily midpoint fixing limits the onshore yuan to trade in a narrow range of 2% above or below_ and Monday's guidance kept the range to between 6.8892 and 7.1704.

The onshore yuan opened at 7.1400 per dollar and weakened to a low of 7.1690 at one point_ the softest level since May 27_ 2020 - mirroring broad falls in other currencies amid a sweeping rally by the dollar thanks in part to the U.S. Federal Reserve's rapid tightening of monetary policy.

It was changing hands at 7.1662 at midday_ 364 pips weaker than the previous late session close. And the midday level was 42 pips away from the lower end of the trading band.

"The market is almost hitting the limit_" said a trader at a foreign bank.

Still_ market participants believe more policy actions would be rolled out should the yuan's weakness persists.

"Given the weak CNY level_ it is likely that PBOC would roll out measures to remove market's one-side depreciation of CNY against the U.S. dollar in the near term_" said Li Lin_ head of global markets research for Asia at MUFG Bank.

Li expects further cuts to the amount of foreign exchange banks must hold as reserve_ after a reduction earlier this month. read more

By midday_ the global dollar index hovered around its two-decade high of 113.996 at midday_ while the offshore yuan was trading at 7.1704 per dollar.