Yuan Hits 3.5-Year High as Dollar Index Falls Below 99

The Chinese yuan strengthened to a 3.5-year high against the U.S. dollar on Friday, as a surprise U.S. Treasury policy announcement sent the greenback tumbling below a key technical level. On the previous trading day, the onshore yuan (USD/CNY) reached 6.7203, while the offshore yuan (USD/CNH) hit 6.7205, with both rates marking their strongest levels since February 2023, according to Investing.com data.

US Treasury Move Sparks Dollar Sell-Off

The primary catalyst for the currency move was an announcement from the U.S. Treasury Department on August 19. The Treasury stated it would increase the single-operation limit for its buybacks of long-term government bonds (10- to 30-year maturities) from $2 billion to at least $4 billion. The new policy is set to take effect on September 9.

Markets interpreted the move as an effort to suppress long-term interest rates, signaling concerns over fiscal sustainability and weakening the U.S. dollar's credit premium. In response, the 30-year Treasury yield fell 9 basis points to 5.19%, while the U.S. Dollar Index (DXY), which measures the dollar against a basket of major currencies, fell 0.85% to 98.78, its first close below the 99 level since June.

PBoC Guides Yuan Stronger

China's central bank has also played a key role in the yuan's ascent. On August 20, the People's Bank of China (PBoC) set the official USD/CNY mid-point fixing at 6.7808, its strongest level since February 2023. This move signals that authorities are comfortable with a gradual appreciation of the currency, while still managing its pace.

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Since an appreciation cycle began in April 2025, the PBoC's reference rate for the yuan has strengthened by approximately 6% from 7.2 against the dollar, according to market data. The stronger currency has increased the appeal of yuan-denominated assets, with Hong Kong's Hang Seng Index rising 203 points on August 20 amid rising foreign investor demand.

Outlook and Key Levels to Watch

Investors are now weighing concerns about U.S. fiscal policy against recent hawkish signals from the Federal Reserve. July FOMC minutes revealed three members dissented in favor of a rate hike, though this failed to support the dollar. Looking ahead, traders will be monitoring several key developments:

• U.S. PMI Data: The release of August Markit PMI data on August 21 will be watched closely. Weaker-than-expected figures could add further pressure on the dollar.
• Treasury Buybacks: The market will fully assess the impact of the expanded buyback program after it officially begins on September 9.
• PBoC Fixing: The PBoC's daily mid-point fixing remains the most direct signal of its policy stance. A sustained fixing below 6.75 would suggest tolerance for further yuan strength, while a return toward 6.78 could indicate a desire to slow the rally.