Yuan is halfway through erasing losses since trade war began

China’s rallying yuan is more than halfway through its recovery from a selloff triggered by President Donald Trump’s trade war.

Underpinning the recent strength in the Chinese currency are its wide interest-rate premium over the borrowing costs on the dollar and the country’s relatively fast economic recovery from the virus pandemic. The prospects of a Joe Biden win in the U.S. presidential election are also boosting confidence in the yuan because the Democrat is expected to be less hostile—or at least more predictable—in his policies toward Beijing.

The yuan is poised for a gain of 0.9% this week to 6.6338 per dollar, closing in on the key level of 6.6 for the first time in more than two years. The currency has jumped 8% since late May, trimming more than half of the declines since China-U.S. disputes in everything from trade to intellectual property protection sent the exchange rate to the weakest level in a decade.

The rapid rally is a double-edged sword for Beijing. While it opens an window for policy makers to liberalize the foreign-exchange market, it also hurts exporters repatriating overseas funds. In October, China relaxed its controls on the yuan at the fastest pace since after a shock devaluation five years ago, easing curbs on capital outflows and giving banks more say on the reference rate. It has set its fixing at levels weaker than analysts and traders had expected for 10 straight sessions as of Friday, suggesting the authorities could be seeking to slow the gains.

While poised for weekly gain, the yuan declined as much as 0.4% on Friday morning.