2026-06-04 · generated by deepseek-v4-flash

CNY Rallies on Policy Boost; Dollar Mixed as Fed Hawks Push Back

CNY strengthened on China FX liberalization pilot and offshore gains, while the dollar traded mixed as Fed officials pushed back against rate cut hopes. Geopolitical tensions in the Middle East and Russia-Ukraine progress added uncertainty.

USD/CNY: Offshore and Onshore Strength

The Chinese yuan rallied across both onshore and offshore markets on Thursday. Offshore CNY (USD/CNH) surged 116 pips to 6.7971, while onshore USD/CNY closed at 6.8005, up 63 pips from the previous night session. The move was supported by the implementation of two pilot foreign exchange liberalization policies in the Qianhai Free Trade Zone, with the first transaction already settled. Separately, Q1 cross-border CNY goods trade settlement in Chongqing reached 85.05 billion yuan, highlighting growing yuan usage. The broader backdrop of China's commitment to opening its markets—underscored by the article highlighting US firms deepening engagement—provided an additional tailwind for the currency.

Fed Policy: Hawkish Tone Caps Dollar Weakness

The dollar index (DXY) struggled for direction as Fed officials maintained a cautious stance. Chicago Fed President Goolsbee stated that inflation progress would lead to rate cuts but that such progress has not yet materialized, emphasizing that cuts are not the only option. Bank of America revised its outlook sharply, pushing the first rate cut to 2027 at the earliest, citing persistent inflation and strong employment. The April nonfarm payrolls report showed 115,000 jobs added, beating expectations, though the prior two months were revised down by a net 16,000. Meanwhile, the University of Michigan's May 1-year inflation expectation dipped to 4.5% from 4.7%, offering a slight relief but remaining elevated. Bond yields reacted modestly, and the dollar gave up some gains against the euro and yen.

Geopolitical Risks: Middle East Tensions and Russia-Ukraine Dynamics

Geopolitical risk returned to the forefront. The Iranian armed forces engaged in skirmishes with US vessels near the Strait of Hormuz, and Iran is drafting a law on the strait's legal status. The UK deployed the destroyer HMS Dragon to the Middle East as part of a convoy escort mission, raising oil supply concerns. Markets also monitored Russia-Ukraine developments after President Putin said the conflict is 'moving toward an end,' which could shift risk sentiment. The Fed's latest Financial Stability Report highlighted geopolitical conflict and oil supply shocks as the top risks to US financial stability. These factors supported safe havens: the yen (USD/JPY) edged lower, and gold held firm near recent highs. EUR/USD traded choppily as ECB officials Escrivá and Nagel flagged AI risks and energy price concerns, respectively, keeping the euro under pressure against the dollar.

Key Data Recap and Outlook

On the data front, the April nonfarm payrolls report (115,000 net additions, 4.3% unemployment rate) was above consensus, while the Michigan sentiment and inflation expectations provided a nuanced picture. The 5-year inflation expectation fell to 3.4%, suggesting long-term anchor remains intact. However, the job market revision and Goolsbee's comments underscored the Fed's data-dependent stance. The dollar's near-term direction will hinge on incoming inflation prints and Fed rhetoric. For CNY, the policy push and stable yuan fixing could extend the recovery, but geopolitical risks and Fed hawkishness may limit further upside. Market participants will also watch for any Iranian response to the US peace proposal and potential oil supply disruptions.