BENGALURU (Reuters) - The Chinese yuan and Indian rupee are expected to shed some of this year’s gains and weaken slightly against the dollar over the coming 12 months if the U.S. Federal Reserve raises interest rates further as expected, a Reuters poll showed.
China's yuan CNY=CFXS hit its highest in just over half a year on Wednesday and was last trading around 6.79 against the dollar.
The currency has gained nearly 2 percent so far this year, with half of that coming just in the last month.
The move comes on the heels of faster-than-expected growth of 6.9 percent in the Chinese economy in the first quarter of this year. But that was largely reliant on fiscal stimulus - the country’s total social financing reached a record 6.93 trillion yuan ($137 billion) for the same period.
Another reason for concern is Moody’s Investors’ Service decision to cut China’s credit rating for the first time in nearly 30 years, with debt continuing to rise.
The yuan is forecast to weaken to 7.05 per dollar in 12 months, according to the poll of over 50 foreign exchange analysts taken this week, even as market confusion reigns over China’s plans to tweak the currency’s midpoint calculation for a second time this year.
China said on Friday it was introducing an unspecified “counter-cyclical factor”, intended to discourage speculation and persistent depreciation pressure, though the currency had been largely stable earlier in the year as the dollar floundered.
The latest poll predictions were similar to last month’s and based on similar Fed rate expectations for two more rate incrases this year.
While the Fed is widely expected to raise rates in June, which would be broadly supportive for the dollar, the currency has been whipsawed in recent weeks as hopes about the U.S. administration’s economic growth plans have faded.
“The top-down drivers for EM (emerging market) currencies suggest slightly stronger performance in spot for the near-term and depreciation over a 12-month horizon,” noted Dirk Willer, head of emerging market strategy at Citi.
“This implies only moderate strengthening in the USD, contributing to stability in the CNY and, by extension, other emerging market currencies. This is assumed to take place against the backdrop of moderately higher U.S. rates.”
Separately, the Indian rupee INR=IN is forecast to weaken to 66.00 per dollar over the next year, a more than 2 percent fall from where it was trading on Wednesday after gaining more than 5 percent so far this year.
Official data on Wednesday showed India’s economic growth unexpectedly slowed to its weakest in more than two years in the first three months of 2017, stripping the country of its status as the world’s fastest growing major economy.
Still, the Reserve Bank of India is expected to stand pat when it meets on June 7, but carrying a less hawkish tone according to Reuters poll published this week.
Polling by Shaloo Shrivastava and Khushboo Mittal; Editing by Ross Finley and Kim Coghill