(Yicai Global) Dec. 4 -- The Chinese yuan was trading offshore at 6.5199 against the US dollar at about 2.45 p.m. Beijing time, more than 100 basis points firmer than today’s opening and its highest level since June 2018.

Analysts said the weaker dollar, the widening China-US interest rate differential and other factors are the main reasons for the yuan’s gains.

Onshore, the yuan opened stronger than 6.55, then broke through the 6.54 mark during intra-day trading and was at 6.5343 at about 2.45 p.m. local time.

The central bank set the yuan’s central parity rate against the greenback at 6.5507 today, up 85 basis points from yesterday. The rate has climbed 248 bps this week.

The yuan has been firmer than 6.5 recently, mainly driven by three factors, said Zhao Xueyi, a researcher at the Institute of International Finance at Bank of China. First, the dollar is approaching its lowest point this year. The United States still faces great economic challenges in this quarter and next year despite good news on coronavirus vaccines. Investors expect the Federal Reserve to step up quantitative easing this month, driving the US dollar index below 92.

Second, the China-US interest rate differential is at a record high. Yields of China’s long-term government and corporate bonds are going up due to the risk of default on redeeming credit bonds. Meanwhile, expectations that the Fed will act to depress yields of long-term Treasuries have led to a drop in 10-year yields and a significant widening in the interest rate spread, pushing the yuan higher against the dollar.

Third, the external environment is easing. The conclusion last month of the Regional Comprehensive Economic Partnership, the world’s biggest free trade agreement, has also contributed to the yuan’s increasing value.

The US dollar index continued to fall today after hitting a two-and-a-half-year low late yesterday. The index had fallen 99 points to 90.611 as of 2.45 p.m. today.

Editor: Peter Thomas