SHANGHAI - ‍China's onshore yuan broke through the key psychological level of seven to the dollar on Tuesday for the first ​time in 2-1/2 years, despite a weaker midpoint set by the central bank, as exporters rushed to sell U.S. dollars before the year ends.

In early afternoon ⁠trading, it hit 6.9951 per dollar, the strongest since May, 2023. The yuan has gained roughly 5% against a softening dollar since early April. 

The People's ⁠Bank of ‌China has sought to prevent the yuan from overshooting through weaker guidance rates and verbal warnings in state media, but has not been able to reverse the currency's strengthening trend.

"Yuan breaching 7/USD is more a signal than any real ⁠shock," said Charu Chanana, chief investment strategist at Saxo in Singapore.

"It shows that the PBOC is comfortable with some CNY strength — but it also raises the odds that they might manage the speed in 2026 so it doesn't turn into a one-way momentum trade."

On Tuesday, the central bank set the midpoint rate at 7.0348 per dollar, 236 pips weaker than Reuters' estimate. The spot yuan is allowed to ⁠trade a maximum of 2% either side of the ​fix each day.

After a softer opening, the yuan soon rose and in early afternoon trading, it broke through the symbolic 7 per dollar level.

Xing Zhaopeng, senior China strategist ‍at ANZ, said that major Chinese state banks will close their books for the year on Wednesday - 2025's last trading day - effectively suspending dollar buying in the spot market and ​driving the yuan higher.

DOLLAR-SELLING RUSH

Guosheng Securities attributed the yuan's recent strength to a weakening dollar and a rush to sell dollars by exporters who usually convert more foreign exchange receipts into local currency towards the end of the year.

The brokerage expects the rush to extend until the Lunar New Year, China's biggest holiday, which next year falls in the middle of February.

"Looking ahead into 2026, the yuan is expected to strengthen steadily, zig-zag higher," the brokerage said in a note to clients.

"However, the road will be bumpy, with continuous, drastic one-way appreciation unlikely."

Another brokerage, China Securities, forecast the yuan would fluctuate around 6.9-7.0 per dollar next year based on economic fundamentals.

Taking into account the comparative appeal of China's capital markets, the yuan could strengthen to 6.5-6.6 per dollar, the brokerage added.

But over the short-term, China Securities cautioned that the yuan's pace of appreciation would ⁠be affected by the central bank's guidance rate and China's relations with trading partners.

"The trend of ‌exports, Sino-U.S. trade talks, and the international trade environment are all key elements" likely to affect the room for yuan appreciation, the brokerage said.

Yuan Tao, analyst at Orient Futures, said managing the pace of yuan appreciation is a delicate balancing act for China's central bank.

"If the yuan rises ‌too fast, it ⁠would badly hit China's export sector. But yuan appreciation would help the economy's reorientation toward consumption," Yuan said.

PBOC needs to balance "short-term pain and long-term gain."

(Reporting ⁠by Shanghai newsroom, additional reporting by Ankur Banerjee in Singapore; Editing by Kate Mayberry and Sam Holmes)