SHANGHAI: China's yuan weakened slightly against the dollar on Wednesday, as support from state-owned banks failed to counter pressure from corporate demand for dollars, traders said.
"Dollar demand by companies was strong in the morning. Bank clients just stopped (buying) at the levels where state banks emerged to sell dollars," said a Shanghai-based trader at a Chinese bank.
The trader also noted the market would keep testing fresh lows, piling pressure on the yuan to depreciate, unless state banks stepped back in.
The People's Bank of China set the midpoint rate at 6.9028 per dollar prior to market open, weaker than the previous fix 6.8934.
The spot market opened at 6.9049 per dollar and was changing hands at 6.9049 at midday, 49 pips weaker than the previous late session close and 0.03 percent softer than the midpoint.
Investors are awaiting the outcome of the US Federal Reserve's policy meeting at 1900 GMT.
The Fed is all but certain to raise its short-term interest rate target by 0.25 percentage point to 0.50-0.75 percent, which would be just the second rate hike since the financial crisis in 2007-08, following tightening last December.
Domestic traders said a key concern is whether the Fed will accelerate the pace of interest rate increases in 2017, and that should have an impact on the yuan in the short term.
Separately, in what appeared to be an effort to shore up investor confidence in the beleaguered Chinese yuan, a phalanx of central bank advisers signaled their readiness to defend the currency and said a stabilising economy will temper future depreciation pressure.
But traders said the verbal defense of the yuan would only have "very limited" impact on the market.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95, firmer than the previous day's 94.97.
The global dollar index fell to 100.99 from the
previous close of 101.07.
In the offshore market, Hong Kong's overnight yuan borrowing rate spiked with the CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) rising to 7.32233 percent, compared with 4.60817 percent a day earlier.
Overnight implied deposit rates for offshore yuan - another indicator showing the state of demand in the market - climbed as high as 7.151 percent at one point in morning trade, Reuters data showed.
The offshore yuan was trading 0.29 percent weaker than the onshore spot at 6.9252 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.1915, 4.01 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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