Chinese yuan falls

China's yuan fell to a one-month low against the dollar on Monday after remarks by a Chinese central bank official suggested continued confidence in the US currency. The yuan closed at 7.5815, down from Friday's close of 7.5740 though well off an intra-day low of 7.5843.
For almost all the day it traded weaker than its daily mid-point, which was set by the central bank at 7.5787 against Friday's 7.5698. The official Xinhua news agency on Sunday quoted an unnamed central bank official as saying dollar assets formed an important part of China's foreign exchange reserves, as "the dollar enjoys a major position in the international monetary system."
Shanghai traders said the comments, made during the US subprime mortgage crisis and a fresh round of trade tensions with the United States, signalled the central bank did not want speculators to try to use global market volatility to push the yuan up sharply against the dollar.
The central bank's decision on Monday to set the yuan mid-point considerably lower for the second straight day was apparently designed to underline this point. "The central bank sent a clear signal to the market that the Chinese government is unlikely to sell off dollar assets just because the dollar is depreciating," said a dealer at an Asian bank in Shanghai.
"It is also clear from the central bank's comments that the government doesn't want to see the yuan appreciate too fast." Added a dealer with another global bank in Shanghai, "We expect the dollar will rebound (globally) a bit this week as the actions taken by foreign central banks make people feel a little more relaxed."
The subprime crisis "may not be as bad as we thought. At least now all the central bankers are making efforts to avoid a further crisis," he said. "That's good news for the dollar."
There was continued talk that even if the crisis did push the dollar down sharply in global markets in coming months, the Chinese central bank might actually slow the yuan's appreciation against the dollar, to prevent the yuan from becoming too strong against currencies such as the euro and the yen.
The yuan's drop on Monday morning pushed it below support around 7.5800, which had been the floor during a sideways consolidation for the past month. But its rebound back near 7.5800 in late trade suggested many in the market do not expect an extended fall beyond that level, traders said. The offshore non-deliverable forwards market hardly moved on Monday, indicating offshore traders did not think the yuan was entering any major downtrend.
In another sign that the Chinese market was starting to think the worst of the US subprime crisis might be over, yuan cash rates implied by onshore dollar foreign exchange forwards returned towards normal levels on Monday.
The quoted one-year implied yuan cash rate closed at minus 0.096 percent bid, compared to around minus 0.300 percent in the morning and as low as minus 0.738 percent on Friday, when it plunged below zero in response to a jump in short-term dollar deposit rates triggered by the crisis.