China’s Yuan closed at a six-month high against the US Dollar on Tuesday, driven by the unwinding of carry trades and a broader shift of capital away from US assets toward Asian markets.

Whereas the onshore Yuan ended the session at 7.2169 per Dollar, marking its strongest close since 11^th November 2024, with a daily gain of 0.76%.

The rally in the Yuan was mirrored by similar gains in the currencies of Hong Kong, Taiwan, and South Korea, as investors moved out of the Dollar and into regional currencies. Optimism over a potential trade agreement between the US and China also contributed to the Yuan's strength, Reuters reports.

The offshore Yuan, which continued trading through the Labour Day holiday, climbed above the key 7.2 per Dollar threshold on Monday, reaching levels not seen since November. At the time of writing, it stood at 7.2160.

Analysts noted that the recent decline in the greenback has eroded the profitability of popular carry trades. where investors borrow low-yielding currencies like the Yuan or Taiwan Dollar to invest in higher-yielding US assets.

“As the strong Dollar story reverses, more Chinese exporters may convert their foreign exchange receipts and deposits to the Yuan in coming months,” stated Gary Ng, senior economist at Natixis.

“The weaker Dollar can provide a window of opportunity for the People's Bank of China (PBOC) to act more in monetary policy as the pressure on capital outflows will be less severe.”

The Yuan's rise followed comments by US President Donald Trump on Sunday, stating that the US was engaging with several countries, including China, to negotiate trade deals, with a fair agreement with Beijing being a top priority.

Earlier on Friday, China said it was “evaluating” a US proposal for talks on Trump’s tariffs but cautioned Washington against using “extortion and coercion” tactics.

“Hopes of a US-China dialogue and signs of progress on possible trade deals have reinforced the de-escalation thematic,” according to Christopher Wong, FX strategist at OCBC Bank.

Before markets opened, the PBOC set the Yuan’s midpoint rate, around which it can fluctuate within a 2% range, at 7.2008 per Dollar, marking its strongest level since 7^th April. However, the adjustment was minimal, just 6 pips stronger than the previous day’s setting.

“Today's fixing showed that the PBOC is reluctant to see strong appreciation of the Yuan,” stated Becky Liu, head of China macro strategy at Standard Chartered.

Liu noted that the Yuan is likely to continue underperforming compared to regional peers, citing factors such as potential early foreign exchange demand from Chinese companies listed overseas for dividend payouts and ongoing uncertainty surrounding US-China trade relations.