China’s central bank set a stronger-than-expected yuan reference rate

China’s central bank stepped in on Thursday, July 31, to stop the yuan from sliding further after the currency dropped to its weakest point in two months against the U.S. dollar.

The People’s Bank of China (PBOC) set its daily yuan reference rate around 7.15 per dollar, its biggest deviation from analyst expectations since late April.

The yuan had come under new stress after Jerome Powell, the chair of the U.S. Federal Reserve, kept markets guessing by refusing to commit to any rate cuts in September. His comments pushed the dollar up to its highest level since early June.

That rise quickly tested confidence among investors who had been betting that the yuan would gain strength in the near term. Hedge funds started backing away from short-dollar trades, and the yuan’s fall accelerated, prompting Beijing to respond.

While the central bank had taken a lighter touch in May and June, when the yuan was faring better, it decided to act this time to limit volatility.

Analysts flag yuan pressure as offshore rate rebounds slightly

Khoon Goh, who leads Asia research at Australia & New Zealand Banking Group, said the PBOC’s intervention was clearly aimed at stabilizing the situation. “Authorities do not want too much volatility in the currency,” Goh said, explaining that the fixing rate was chosen to limit further weakness despite strong dollar momentum.

The offshore yuan responded by gaining 0.2% on Thursday, climbing to 7.1991 per dollar after touching 7.2146 the previous day, the weakest since the first week of June. That bounce came as other regional currencies, like the Singapore dollar, also held their ground. But many others in Asia slipped further under the weight of overnight gains in the greenback.

Expectations earlier in July had leaned in favor of a stronger yuan, with research from Morgan Stanley, UBS Global Wealth Management, and Deutsche Bank predicting that the currency would hit 7.1 or even fall below that.

Instead, the combination of Powell’s comments and trade momentum benefiting the U.S. flipped the narrative. The Bloomberg Dollar Spot Index jumped sharply on Wednesday after Powell said no decisions had been made yet about a September rate move. His tone was more hawkish than many expected, and traders quickly reduced their bets on U.S. rate cuts in 2025.

Fiona Lim, a senior strategist at Malayan Banking Berhad, said the dollar’s resurgence caught many investors off guard. “Markets were caught wrong-footed on the dollar when Powell sounded more hawkish than expected,” Lim said, adding that China’s use of its daily fixing rate was a signal that the PBOC is still prioritizing currency stability while giving markets some space to operate.

In effect, Beijing is walking a tightrope, intervening enough to keep the yuan from crashing, but not so much that it disrupts overall trading behavior.

Trade and inflation outlooks shape central bank decisions across Asia

Derek Holt, who leads capital markets economics at Scotiabank, warned that there could be limited room for easing U.S. monetary policy in the near term.

“If, however, tariffs continue to pass through into inflation with reasonably resilient payrolls at a lower breakeven rate in light of more restrictive immigration policy, then the Committee’s willingness to cut in September is likely to remain low,” Holt said.

That scenario points to continued strength in the dollar, especially if inflation stays elevated and job markets hold up; two variables that directly affect how currencies like the yuan behave.

The U.S. dollar has now extended its winning streak to near a two-month high, causing disruptions across multiple Asian markets. In China, the central bank’s decision to deviate sharply from analyst expectations underlines just how sensitive the currency landscape has become in 2025, especially under Donald Trump’s administration and its renewed emphasis on protective trade deals.

Meanwhile, in Hong Kong, the local currency stayed dangerously close to the weaker end of its fixed band against the U.S. dollar. Despite repeated moves by the Hong Kong Monetary Authority to defend the currency, the Hong Kong dollar traded just pips away from breaching its lower threshold.

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