China banks seen selling dollars to brake yuan slide as key support level eyed

SHANGHAI: Chinese state-owned banks sold dollars on Thursday as the yuan inched toward the psychological 7-per-dollar level, a level not seen in more than eight years, traders said.

The yuan has now depreciated by more than 6 percent against the dollar so far this year, with its slide accelerating along with other emerging market currencies in recent weeks as the greenback surged on expectations of higher US interest rates.

State-owned banks were offering dollar liquidity at around the 6.92 level to prevent the yuan from falling too fast, two currency traders said.

The yuan "had no choice but to catch up with the strong dollar," one trader at a foreign bank in Shanghai said.

"The 7-per-dollar level is becoming a threshold," the trader said.

The People's Bank of China set the mid-point rate at 6.9085 per dollar prior to the market open, weaker than the previous fix 6.8904.

In the spot market, the yuan opened at 6.9240 per dollar and was changing hands at 6.9195 at midday, 5 pips weaker than the previous late session close and 0.16 percent softer than the midpoint.

Both the official guidance rate and the spot rate hit their weakest level since June 2008.

In the offshore market, the yuan was trading 0.5 percent weaker than the onshore spot at 6.9507 per dollar. It fell past 6.96 level earlier on Thursday for the first time since it started trading overseas in late 2010.

Policy advisers told Reuters last week that the 7-per-dollar mark is not seen as a line in the sand, but said Beijing is likely to intervene to slow the yuan's descent if that level is tested too suddenly or if there are signs of a spike in capital flight.

The gap between the yuan's onshore and offshore rates widened to around 400 pips in morning trade, but traders said they had not seen, nor would they expect, intervention offshore to shrink the gap.

"China has officially entered the IMF's reserve basket. Intervention that is too obvious would draw much attention," said the trader at the foreign bank.

The yuan is not alone in feeling the pressure from the rising dollar.

Malaysia has been hard hit by capital outflows from emerging markets as investors expect US interest rates to rise faster under the incoming administration of President-elect Donald Trump, who is expected to opt for an expansionary fiscal strategy that will fuel inflation.