The yuan closed slightly lower against the dollar on Monday, pressured as banks bought dollars to prepare to cover China's latest hike in bank reserve ratios, which will take effect late this week.
The yuan finished at 7.0000 versus the dollar, down from Friday's close of 6.9935, also reflecting the Chinese central bank's lower mid-point for the yuan at 7.0078 to the dollar, down from Friday's 7.0006.
"The market saw a rise in dollar demand due to the coming bank reserve hike, and the central bank made this an easy excuse to allow the yuan to take a break after its recent fast appreciation," said a dealer at a European bank in Shanghai.
"But the central bank is unlikely to change its policy of rapid yuan appreciation, at least until the end of the first half of this year, partly because China's inflation has not shown any clear sign of easing," he said.
China last week announced that March inflation was at a steep 8.3 percent, although that was down from an 11-year high of 8.7 percent in February. The central bank has said explicitly that it would use yuan appreciation to help fight inflation.
The central bank's latest reserve hike, announced last Wednesday, will be effective from this Friday.It has been requiring that many large banks settle reserve hikes in dollars instead of yuan since last August to control the supply of dollars on the domestic foreign exchange market, in order to curb speculation on yuan appreciation.
The yuan rate against the dollar is now little changed from its level at the start of April, after jumping 4.2 percent in the first quarter for an annualised rate of about 17 percent.
It has traded above the psychologically important 7.0 rate several times in April, however, breaching that mark for the first time since 1993. "The central bank appears to be hoping to keep the yuan around the 7.0 level for some time before allowing a clear breakthrough," said a dealer at a US bank in Shanghai. "But we expect the yuan to resume rising late this week or next week after the reserve hike is settled," he said.
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