(Yicai Global) June 2 -- The Chinese yuan continued to rebound versus the US dollar today to its strongest level in more than a week, after nearly a month of weakening that ended mid last week. Analysts predict it will continue to hold strong.

The onshore yuan was at 7.0999 per dollar at 5.40 p.m. local time, the strongest point for the redback in more than a week.

Despite a deluge of bad news in recent months, major domestic and overseas institutional investors are not adjusting their full-year forecast for the yuan-dollar exchange rate based on short-term factors, according to interviews conducted by Yicai Global.

The exchange rate will remain between 7.0 and 7.2 in the foreseeable future, said Liu Jie, head of China strategy at the UK’s Standard Chartered Bank.

The central government has vowed to keep the yuan exchange rate basically stable at an appropriate and balanced level this year, so we can expect the yuan-dollar rate to remain at around 7, said Wang Tao, chief China economist at Swiss lender UBS.

The yuan should stay around 7.1, said Zhou Hao, senior economist for emerging markets at Germany’s Commerzbank. The currency is unlikely to depreciate further due to continued dollar weakness. Also, the market has priced in the current international tensions which are not new, he added.

Though the yuan remains under short-term pressure, it is unlikely to move above 7.18 per dollar unless there are extreme circumstances, said an official in charge of the financial market division at a foreign bank. There is likely to be a difference of around 5 percent between the highest and lowest exchange rates this year, similar to previous years, he added.

There are several factors working in China’s favor, Liu said. There have been high inflows of overseas capital into the mainland stock and bond markets, the country is expecting a current account surplus in the second-quarter which will sharply expand the spread between the yuan and dollar, and China's strong economic growth, as compared with major developed countries, should also support a strong yuan.

Future Sentiment

"Geopolitical tensions may, however, partly offset the impact from improved fundamentals," Liu said. "Further intensified volatility in the exchange rate between the US dollar and Chinese yuan can be expected as uncertainties rise with the approach of the US presidential election."

"The Dollar Index, which is the value of the dollar relative to a basket of foreign currencies, will continue to impact future moves of the yuan," the official at the foreign bank said. "What is sure is that two-way fluctuation will be wilder and judging the specific direction will become harder.”

Market sentiment and the dollar index will dominate short-term exchange rate movements more than economic fundamentals, he said.

As the global economy begins to recover in the second half of the year, investors’ risk appetite should pick up, particularly in emerging markets, Wang said. This will put considerable downward pressure on the dollar and help the yuan to rebound.

The yuan still offers decent yields, with market rates at between 1.3 percent and 1.7 percent, about 1 percentage point higher than the dollar, she added. Undervalued Chinese equities are also generally supportive of yuan-denominated assets.

Editors: Tang Shihua, Kim Taylor