China’s currency has rallied to its highest level in more than two years, wiping out most of the losses suffered since the start of the country’s trade war with the US.

The onshore-traded renminbi strengthened 1 per cent to Rmb6.4614 per greenback on Monday as it crossed the important 6.5 per dollar threshold for the first time since June 2018. That came as the US currency, as measured against a basket of its international peers, fell 0.3 per cent.

The renminbi has been boosted by China’s economic recovery from Covid-19 after authorities successfully controlled the virus, as well as hopes that the incoming US administration of Joe Biden could lead to reduced tensions between Beijing and Washington.

The Chinese currency is roughly now back to the level it was before President Donald Trump kicked off a trade war between Beijing and Washington in mid-2018.

Investors piled into renminbi assets last year as a yawning gap opened between onshore interest rates in China and those in the US and Europe, where central banks slashed lending benchmarks to record lows.

Line chart of Renminbi per dollar showing Renminbi starts 2021 on course to erase trade war losses

Julia Ho, head of Asian macro at Schroders, said other factors supporting the renminbi included “the country’s improved current account position and pent-up demand among global investors who wish to diversify away from the US dollar”.

Ken Cheung, chief Asia foreign exchange strategist at Mizuho Bank, said traders were also snapping up the renminbi in the absence of any strong signal from the People’s Bank of China that it wanted to curb the currency’s appreciation.

The central bank’s comfort was reflected in its daily fixing rate for the midpoint of the renminbi’s trading band against the dollar, around which the Chinese currency can strengthen or weaken 2 per cent. On Monday morning, the PBoC set the midpoint at Rmb6.5408 against the dollar, or stronger than analysts polled by Bloomberg had expected.

“That may imply the PBoC will tolerate a further renminbi rally in 2021,” Mr Cheung said, adding that the currency could strengthen to Rmb6.3 against the dollar in the first half.

The latest gains for the Chinese currency also followed an announcement by the PBoC at the weekend that it would increase the influence of the euro in determining the daily midpoint fix at the expense of the dollar. That decision came on the heels of a new trade pact between China and the EU.

The strengthening of China’s onshore-traded renminbi past the 6.5 per dollar handle followed a similar move by the offshore-traded currency, which is subject to fewer trading restrictions, on Thursday.

Analysts suggested that emerging market currencies could continue to benefit from dollar weakness as coronavirus vaccines are rolled out. Indonesia’s rupiah rose 1.2 per cent against the dollar on Monday.

“Uncertainty is diminishing and the strong global growth recovery should favour the rest of the world, so we think the dollar has some overvaluation to work off,” said Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management.

However, Mizuho’s Mr Cheung warned that the renminbi’s rally could ebb in the second half of the year once large-scale Covid-19 vaccination programmes were well under way in the US and Europe, helping to boost these markets’ relative appeal.