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Spot yuan fell to a seven-month low early Monday after the central bank set a sharply weaker midpoint for the currency, but recovered to close up slightly for the day. The People's Bank of China set the yuan midpoint at 6.3230, nearly 2 basis points weaker than the prior setting, marking a decline of 0.3 percent, the most abrupt day-on-day drop since mid-March.
Spot yuan continued to price below the midpoint, opening down at 6.3720 then diving further to trade briefly at 6.3827, its weakest trade against the dollar since November 29, 2011. However, spot prices bounced off this low quickly and closed at 6.3633, up 9 pips from its last close and 87 pips up from market open. This kept the yuan well away from its intra-day low but still marked a move out of last week's range.
"Before today the yuan was moving between 6.35 to 6.36, but now it is fundamentally moving above 6.37," said a trader at a large Chinese bank in Beijing. The drastic nature of Monday's drop was in part due to a three-day weekend in China. Chinese markets were closed for a public holiday on Friday, when the dollar index - which Beijing frequently refers to when setting the yuan midpoint - rose by 0.9 percent against a basket of currencies in overnight trading. It rose again slightly the next trading day. Offshore yuan prices continue to track the spot yuan, trading at 6.3715 at close.

Copyright Reuters, 2012

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