The yuan fell against the dollar on Friday as much of the market speculated the US subprime mortgage crisis might actually slow, not accelerate, the Chinese currency's appreciation against the dollar. The US Federal Reserve may ease monetary policy and the dollar could fall globally in coming weeks or months because of the crisis.
But traders in Shanghai think the Chinese central bank might respond by reducing the pace of the yuan's uptrend against the dollar, in order to prevent the Chinese currency from becoming too strong against the euro, the yen and other currencies.
"Everybody is talking about the possibility of the US crisis spreading to other parts of the world," said a dealer at a major Chinese commercial bank.
"This has caused big uncertainties for the previously quite clear prospects for the yuan to accelerate its pace of appreciation in the long run. Banks are reluctant to trade heavily today."
The yuan closed at 7.5740 to the dollar, down from Thursday's finish of 7.5646. The 0.12 percent daily drop was the biggest for three weeks. However, the Chinese currency closed well off an intra-day low of 7.5808 after holding strong support around 7.5800, which has been tested and held several times over the past month.
Before trade started, the central bank set the yuan's daily mid-point lower at 7.5698 against Thursday's 7.5648, apparently to deter speculators from any attempt to take advantage of the global market turmoil to push the yuan up sharply.
But the fact that the yuan then traded much lower than its mid-point suggested the market believed the subprime issue could have a bigger impact on Chinese foreign exchange policy.
"The central bank's lower mid-point is a factor today, but it was overshadowed by US subprime loan concerns," said a Shanghai dealer at a European bank. The yuan rose 0.52 percent against the euro in China's forex market on Friday, its biggest daily gain since mid-June, illustrating the risk that the yuan could rise sharply against other currencies during a global crisis in the absence of guidance from the central bank.
Weakness in the spot yuan rate against the dollar spread to the offshore non-deliverable forwards market. One-year NDFs quoted the yuan at 7.1340/7.1400 in the late afternoon, implying appreciation of 6.02 to 6.11 percent in a year's time from Friday's mid-point, down from 6.17-6.32 percent on Thursday.
On Wednesday, implied appreciation had jumped to 6.22-6.31 percent from Tuesday's 5.51-5.58 percent. That brought the NDF market close to the 6.6 percent appreciation implied in late March - the highest implied forecast since the yuan's peg to the dollar was removed in July 2005.
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