(Yicai Global) Jan. 5 -- The Chinese yuan is expected to appreciate to between 6.7 and 6.8 against the US dollar this year, with financial institutions predicting a softening in the greenback.

British bank Barclays and Chinese securities giant Guotai Junan International see the exchange rate at 6.7 by the end of the year.

Last year, the dollar index rose to a high of 114.78 on Sept. 28 from 94.63 on Jan. 14, but retreated in the fourth quarter, closing out the year at 103.49. The yuan fell 7.86 percent against the dollar.

“The overall weakness of the US dollar will continue until at least the first half of 2023,” said Zhou Hao, chief economist of Guotai Junan International. “Downside risks have intensified as the Bank of Japan is likely to unexpectedly accelerate policy tightening.”

Although major institutions expect the US Federal Reserve to raise interest rates by 25 basis points at least two or three times more this year, the cumulative increase will still be much less than last year’s hike of 400 bips. Fed tightening is nearing an end.

Moreover, China will ease its Covid-19 travel restrictions from Jan. 8, with expectations for an economic rebound and prospects for overseas fund inflows rising and the recovery of fundamentals likely to support yuan gains.

“We believe China’s economic recovery in 2023, especially after the second quarter, will become more obvious,” said Gao Ting, chief strategist at the research division of Nomura Orient International Securities. “The inflow of northbound funds may increase from 2022, and foreign capital is expected to become an additional liquidity highlight throughout the year.”

An exchange rate of 6.8 will not be an obstacle for the yuan, Zhou said. The most important driver of the redback comes from China itself, he added, noting that the economy will see a strong recovery this year, with full re-opening in sight. At the same time, policy is less hesitant to support economic growth, and will focus on consumption.

The reopening process will inevitably affect China’s balance of payments, but the yuan is still very likely to advance versus the dollar, according to Barclays. But the bank does not rule out a short-term rebound in the greenback.

UBS said that in the near run, the Swiss banking giant was cautious about further dollar depreciation, mainly because US interest rates are still very attractive and the dollar is supported by elevated risks to global growth. Markets are overly optimistic about the Fed's work to curb inflation, UBS added.

Editor: Futura Costaglione