Chinese Yuan breaches 7 per dollar due to recession fears

Data on Friday showed China's economy was surprisingly resilient in August, with factory output and retail sales both growing more than expected last month. But a deepening property slump weighed on the outlook.

"Growth, policy divergence between the US and China could continue to support the USDCNH in the next few months, even if some pullback is seen intermittently," said analysts at Maybank, who noted some "upside surprises" in the Chinese data release.

Often used as a liquid proxy for the yuan, the Aussie hit a two-month low of $0.66, before regaining 0.28 percent to $0.67.

The kiwi likewise fell to $0.59, its lowest level since May 2020, and was last up 0.23 percent to $0.59. The euro was up 0.05 percent to $0.99995, while sterling fell 0.03 percent to $1.14.

Traders will now shift their focus to a slew of monetary policy meetings by the Federal Reserve, the Bank of Japan (BOJ), and the Bank of England next week, with the Fed in centre stage.

US Treasury yields rose after data released overnight showed US retail sales unexpectedly rebounded in August, while a separate report from the Labor Department showed initial claims for state unemployment benefits fell 5,000.

The two-year US Treasury yield, a bellwether for interest rate expectations, scaled to a fresh peak of 3.90 percent on Friday, the highest since 2007. Fed funds futures point to a 75 percent chance of a 75 basis point rate hike at next week's meeting and a 25 percent chance of a 100 bps increase.

This could spell further pain for the battered Japanese yen, which has been a victim of the surging greenback and growing interest rate differentials.

But three sources familiar with the thinking of the BOJ said the central bank has no intention of raising interest rates or tweaking its dovish policy guidance to prop up the yen.

The dollar was 0.09 percent lower against the yen at 143.36 but remained on track for a fifth straight weekly gain.

"The dollar strength will persist, at least in the near term. The two key factors that are supporting the US dollar are still in place, so we've got very hawkish market pricing for the FOMC and also, we've got this worsening global growth outlook," said Carol Kong, senior associate for international economics and currency strategy at Commonwealth Bank of Australia.

"As long as the prospect for the global economy is still weak, the US dollar can remain strong and perhaps edge a little bit higher."

The US dollar index firmed at 109.69, close to its two-decade peak of 110.79.