Yuan ends down for second day

China's yuan closed lower against the dollar on Thursday, continuing a modest correction for a second day as it took its cues from the central bank's weaker mid-point. Dealers said the yuan was set for a further correction after recent gains but expected it to be mild.
The yuan closed at 7.5984 to the dollar, down from Wednesday's finish of 7.5947, after the People's Bank of China fixed its daily mid-point at 7.6060 before the start of trade, down from Wednesday's 7.6007.
It was the second day in a row of weakening in the mid-point, a reference rate that fixes the parameters for the yuan's movements, and followed a strong rally in the Chinese currency since June 11 without a significant correction.
On Tuesday, the yuan broke the key 7.6000 level for the first time and hit an intraday high of 7.5929 to the dollar, its highest trading level since Beijing revalued the yuan and depegged it from the dollar in July 2005.
"After breaching 7.6000, the market needs time to digest the fast appreciation in recent trade, but the correction is likely to be moderate and unlikely to affect the yuan's uptrend in the long run," said a dealer at a Chinese commercial bank.
Dealers also expected the US dollar to rebound against other major currencies, which would contribute to a pause in the yuan's recent strong performance.
"The US dollar is weak these days, but there are rising expectations that the dollar will technically rebound next week," said a dealer at a major US Bank. "Although the central bank guides the market by setting the mid-point, it cannot ignore trade in other currencies," he said.
Analysts said the yuan would maintain its steady pace of appreciation in the medium term but it might see increasing volatility after the central bank widened its daily trading band on May 21 to 0.5 percent in either direction, up from 0.3 percent. "The widening trading band increases the yuan's flexibility towards other currencies," said an analyst at a major Chinese state-owned bank.
One-year offshore non-deliverable forwards (NDFs) quoted the yuan at 7.2621/7.2661, indicating appreciation of 4.68 to 4.74 percent in a year's time from Thursday's mid-point, down from 4.84 to 4.89 percent on Wednesday.