Dovish signals emanate as US Fed decides to continue asset purchases

The Chinese yuan is expected to gain further strength as a weakening US dollar will increase the appreciation pressure on other currencies and financial assets, experts said on Thursday.

Their comments came after the US Federal Reserve said after its final policy meeting for this year on Wednesday that it will keep buying Treasury securities until the economy makes substantial progress and keep long-term borrowing rates low for an indefinite period.

Fed Chairman Jerome Powell's decision to keep the benchmark interest rate unchanged at the record-low level of near zero until at least the end of 2023 saw the renminbi strengthen to 6.5280 against the greenback in onshore trading on Thursday, while share prices notched up gains in most of the Asian bourses.

Digital assets also rallied with cryptocurrency Bitcoin rising 5.5 percent to $22,366. The virtual currency has risen by nearly 20 percent this week and breached the $22,000 mark for the first time.

Bank of China said in a recent report that it expects the renminbi/dollar exchange rate to fluctuate between 6.3 and 7 next year, given the possibility of a weaker dollar.

Indications that the US Fed is on a dovish path came after it said it will "continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion every month until substantial further progress has been made toward the committee's maximum employment and price stability goals".

Though recent US economic data have shown a slowdown in the labor market recovery and weakness in retail sales, Fed officials projected better figures than their forecasts in September during the meeting. A median projection expects the US economy to shrink by 2.4 percent this year, followed by a rebound of 4.2 percent in 2021.

The Fed has also stressed the sustainability of its quantitative easing measures in the longer horizon, as indicated by the bond purchase guidance, said Ming Ming, an analyst with CITIC Securities. Although the US central bank has not changed the scale and period of purchasing Treasuries, the new statement will extend the market's expectation on the accommodative monetary policy and avoid panic from monetary tightening, Ming said.

The US central bank also indicated that the asset purchases will foster smooth market functioning and create accommodative financial conditions, while supporting the flow of credit to households and businesses. Coupled with the low interest rate, the asset purchases aim to increase support for the US economy amid the surging coronavirus outbreak.

Senior officials from the People's Bank of China, the central bank, said earlier that unconventional monetary easing, taken for countering the negative effects of the COVID-19 pandemic, should be withdrawn at a proper time and replaced by additional monetary measures to avoid a "cliff" or a sudden change of policies.

"We will promote structural monetary policy tools and guide financial institutions to optimize their credit structure according to the changing economic environment and market demand," Liu Guoqiang, deputy governor of the PBOC, wrote in an article published in China Finance, a magazine owned by the PBOC.

The normalization of China's monetary policy will help keep interest rates stable, albeit higher than those in the US, and support a strong renminbi.

Central banks around the world are also exploring how unconventional policies already in use, such as purchases of sovereign bonds or corporate debt, can be used more aggressively. They can play a critical role in speeding the recovery from COVID-19, as well as from future shocks hitting economies, said Tobias Adrian, financial counselor and director of the International Monetary Fund's Monetary and Capital Markets Department.

"But these even more accommodative policies may pose substantial risks down the road by encouraging excessive risk-taking and a build-up of vulnerabilities," Adrian said.

"What investors want to know from the Fed is how much policy support can be expected out of the US central bank, in what form and how soon," said Han Tan, a market analyst at FXTM, a global foreign exchange trading platform. "Hints of more incoming monetary policy support in the form of asset purchases could mean further gains for stocks."