China's yuan pared some earlier gains against the dollar on Tuesday after fresh U.S. tariffs on Chinese goods kicked in, heightening trade tensions and threatening to put more pressure on the uneven economy.
The United States doubled trade tariffs on Chinese goods to 20% on Tuesday, and Beijing quickly said it will impose additional tariffs of 10%-15% on certain U.S. imports from March 10 as retaliation.
But the currency market largely appeared calm following the tit-for-tat measures, traders said, with the onshore yuan only giving back some of its modest morning gains.
As of 0551 GMT, the onshore yuan was 0.07% higher at 7.2826, down from an intraday high of 7.2763.
It offshore counterpart traded at 7.2867 yuan around 0551 GMT.
The central bank had continued to guide the currency firmer hours ahead of the expected imposition of the U.S. tariffs.
The People's Bank of China (PBOC) has been offering support for the currency market by persistently setting firmer-than-expected midpoint fixings since mid-November, with traders and analysts interpreting the moves as an official attempt to keep the yuan steady.
"However, we expect the Chinese authorities to eventually allow RMB to adjust in response to significant tariffs as evident in the 2018/2019 trade war experiences," analysts at Nomura said in a note.
Trade tensions had been one of the key drags on the yuan during Donald Trump's first term as president. A series of tit-for-tat U.S.-China tariff announcements drove the Chinese currency down more than 12% against the dollar between March 2018 and May 2020.
The yuan has lost 11.7% of its value against the dollar since Trump left office the first time in January 2021.
Prior to the market opening, the PBOC set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at 7.1739 per dollar, 6 pips firmer than the previous fix of 7.1745, albeit against a broadly stronger dollar in global markets.
Tuesday's official midpoint was 988 pips firmer than a Reuters estimate of 7.2727.
"We see the central bank will likely continue to anchor the spot with its daily fixing and look at yuan strength on a basket level (against many trading partners' currencies), especially this week as Two Sessions start," said Lemon Zhang, FX strategist at Barclays.
Zhang expects the yuan to swing between 7.25 and 7.3 in the near term.
Parliamentarians and political advisers gather in Beijing every March for two parallel sets of meetings called the Lianghui or "Two Sessions," where key economic growth targets and the policy agenda will be unveiled.
Trump said on Monday he told the leaders of Japan and China they cannot continue to reduce the value of their currencies as doing so would be unfair to the United States.
Analysts at BofA revised their forecasts for the yuan slightly higher to 7.5 at the end of the first quarter from 7.6 previously, while maintaining end-June predictions at 7.6.
"We maintain that U.S. tariff risks and technology restrictions should not be underestimated with April 1 tariff headlines still looming," they said in a note published last week.
"Consequently, we still hold a bearish view into 2Q and maintain a USD/CNY forecast of 7.60. The risk to this view is that China either achieves a negotiation pathway to hold of tariffs or engages in more aggressive stimulus to lift growth expectations."
