(Bloomberg) — China’s yuan is heading for its best annual performance in five years as growing optimism about the nation’s assets and economy outweighs concerns over US trade tensions.

The offshore yuan has strengthened by nearly 4% against the dollar in 2025 as the authorities have supported the currency through their daily fixings, a rally in China stocks has lured inflows, and the dollar has weakened. Analysts remain largely bullish for 2026, with Goldman Sachs Group Inc. raising its forecasts last month.

The yuan’s gain this year is a far cry from what happened during the first round of trade tensions that broke out in 2018. At that time, the currency slid more than 13% from its high in March of that year to a low in September 2019, driven by speculation Beijing would be compelled to weaken the yuan to help support growth.

“The Chinese yuan has room to strengthen from here and the technical call is for dollar-yuan to move towards 7 per dollar some time in 2026,” said Wee Khoon Chong, a senior Asia Pacific market strategist at BNY in Hong Kong. “A stable and strong yuan plays an important role to secure the market’s and investors’ confidence.”

The yuan’s advance this year hasn’t been without setbacks. The currency sold off during the tariff chaos caused by US President Donald Trump in April and then languished in the middle of the year under the weight of a sluggish economy. It was only in August that it began to strengthen again as global risk sentiment improved.

The slump in the dollar has helped. The Bloomberg Dollar Spot Index has dropped by about 7% this year amid concerns about US policy uncertainty and the swollen budget deficit.

Beijing’s playbook for dealing with the current US trade war differs from that which it deployed during the first Trump administration. In 2018-19, the options were limited as the economy was heavily reliant on US consumers. Now, however, China has diversified its exports toward the so-called Global South and extended its dominance in critical supply chains, such as rare earths.

The majority of analysts see further gains in the yuan in coming months.

Federal Reserve interest-rate cuts will weaken the dollar and help buttress the yuan and other Asian currencies next year, said Lin Li, head of global markets research for Asia at MUFG Bank Ltd. in Hong Kong. China’s currency may end next year at 6.95 per dollar, she said.

Goldman Sachs raised its forecast for the onshore yuan last month, citing optimism over China’s exports and current-account surplus. The currency may appreciate to 6.95 in about three months and reach 6.85 in a year, the investment bank said.

Selling the dollar against the yuan is one of the top trades for 2026, according to Australia & New Zealand Banking Group Ltd. Before the Lunar New Year holidays, Chinese exporters will likely convert more of their foreign-exchange receipts and also dollar holdings parked at commercial banks back into the yuan, analysts led by Khoon Goh wrote in a note published Monday.

Some are calling for the authorities to allow a faster pace of gains.

It’s time for China to promote a sharp appreciation of the yuan against the dollar and on a trade-weighted basis, as the currency is “hugely undervalued,” former US Treasury officials Brad Setser and Mark Sobel wrote in an article last month. The yuan is about 18% below fair value, they said.

China will likely experience an increasing need to allow the yuan to gain in the coming year, as pressure for the currency to rally will be “one way and mounting,” Stephen Jen, chief executive of Eurizon SLJ Capital, wrote in a note last month.

One common argument among yuan bulls is that the currency is too cheap versus those of its trading partners. China’s real effective exchange rate, which strips out the impacts of inflation, is close to the lowest since 2011, according to data from the Bank for International Settlements.

There are drawbacks to allowing the currency to appreciate too rapidly. A substantially stronger yuan may dent China’s exports, weighing on growth. Additional gains may encourage inflows of so-called hot money, leading to potential asset bubbles and threats to financial stability.

The People’s Bank of China appears to be seeking to slow the yuan’s rally. On Tuesday, the central bank set its daily fixing for the currency at a weaker level than the median estimate of analysts’ forecasts, following a similar move last week for the first time since July.

Even so, many in the market see the yuan extending its recent rally.

“If trade-deal discussions proceed smoothly, the yuan could strengthen to 7 by year-end, and it could gain further to the 6.5-to-6.8 range next year,” said Chi Lo, a global market strategist at BNP Paribas Asset Management in Hong Kong. “Then, if more and more overseas investors are convinced that China is turning around, the money that left China three years ago would come back.”

(Updates to add ANZ note in 11th paragraph, REER in 15th.)

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