China yuan hits 8-month high as Trump's tax bill dents dollar

China's yuan advanced further on Tuesday after enjoying two consecutive months of gains, briefly renewing an eight-month high against a dollar dragged down by worries over U.S. President Donald Trump's spending bill.

Signs of easing trade tensions between the world's two largest economies underpinned the Chinese yuan over the past two months.

Traders expect authorities to remain focussed on maintaining currency stability, noting that wide yield differentials with the United States and persistent domestic deflationary pressures do not justify a significantly stronger yuan.

The yuan's uptick on the day reflected broader dollar weakness as U.S. Senate Republicans tried to pass Trump's sweeping tax-cut and spending bill, despite divisions within the party about its expected $3.3 trillion hit to the nation's debt pile.

The onshore yuan USDCNY jumped to a high of 7.1538 per dollar, the strongest level since November 8, 2024, before changing hands at 7.1625 as of 0407 GMT. Its offshore counterpart USDCNH traded at 7.1579.

However, major Chinese state owned banks were seen actively purchasing dollars in onshore spot market to effectively limit the yuan's gains, multiple people with knowledge of the matter said.

"We believe policymakers will continue to pursue setting the USD/CNY fix at a 'measured pace' to help anchor relative stability in yuan overall," said Christopher Wong, FX strategist at OCBC Bank.

"Any sharp or rapid yuan appreciation may risk triggering exporters rushing to sell dollar holdings and that cycle may result in excessive yuan volatility and strength."

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate USDCNY at 7.1534 per dollar, its strongest since November 8, 2024, and 25 pips weaker than a Reuters estimate of 7.1509. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

Based on Tuesday's official midpoint setting, the yuan's trade-weighted value against its basket of currencies, as measured by CFETS yuan basket index (.CFSCNYI), fell to 95.15, the lowest level since January 4, 2021.

The CFETS index has lost 6.23% year-to-date, when the yuan strengthened 1.9% versus the dollar.

"Despite the marginal appreciation (in spot rate), the RMB NEER remains very low due to the sharp appreciation seen in other currencies such as the euro," said Chang Wei Liang, FX & credit strategist at DBS.

On the data front, market reaction was largely muted to a private survey, which showed China's factory activity returned to expansion in June, supported by an increase in new orders that lifted production.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -5.00 pips vs. offshore -5.00

• Three-month SHIBOR (SHIBOR=) 1.6 % vs. 3-month CNH HIBOR 1.9 %

LEVELS AT 0407 GMT: