The yuan exceeded the psychologically important level of 7 per dollar for the first time since September 2024, amid expectations that the People's Bank of China would permit a gradual strengthening of the national currency to maintain confidence in financial markets.

Last week, the offshore yuan advanced by 0.2% to trade at 6.9964 per dollar. This movement was supported by the People's Bank of China's decision to set the official fixing at its highest level since September 2024.

The Chinese currency is on track for its best annual performance against the dollar in the past five years. Support for the yuan comes from the protracted weakness of the US dollar, capital inflows amid the recovery of China's stock market, and waning geopolitical tensions.

In recent months, Beijing has consistently used the fixing mechanism to facilitate a moderate strengthening of the currency, aiming to support the national currency without provoking extreme volatility in the foreign exchange market.

On the mainland exchanges, the yuan rose by 0.1% last week, reaching 7.0067 per dollar. The market was sensitive to dollar sell-offs, with major Chinese banks actively buying US dollars near the 7.006 level.

Despite the advance against the US dollar, some market participants believe the yuan remains undervalued, considering the trade-weighted exchange rate and ongoing deflationary trends in China's economy. According to estimates from Goldman Sachs, the currency is undervalued by about 25% relative to fundamental economic indicators.

The renminbi will likely maintain resilience in the range of 6.95 to 7 per dollar in the first half of the next year.