The yuan closed slightly lower against the dollar on Friday, after the Chinese central bank set a marginally lower reference rate in the wake of its latest monetary tightening.
Traders said the central bank's lower reference rate appeared to be a warning to the market not to try to push the yuan up aggressively following the reserve ratio hike, which was announced after the close on Thursday.
But they said that given the central bank's concern about inflation and US diplomatic pressure for a stronger yuan to help correct trade imbalances, the central bank was expected to permit the yuan to rise moderately by the end of next week.
China's trade surplus for August, to be announced on Tuesday, could be the second-biggest on record because of robust exports and a tapering off in imports after an oil-related leap in July, according to the median forecast of 19 economists polled by Reuters. The forecast is for a surplus of $25.2 billion, up from $24.4 billion in July and $18.8 billion in August 2006. The record monthly surplus of $26.9 billion was set in June.
Before the start of trade on Friday, the central bank fixed the yuan's daily mid-point at 7.5411, marginally weaker than its Thursday level of 7.5410. Several dealers predicted the yuan would breach 7.5300 before the end of next week.
Reflecting those expectations, one-year dollar/yuan non-deliverable forwards fell to 7.1800/50 late on Friday from 7.1900/50 in late trade on Thursday.
The new level implied yuan appreciation from Friday's mid-point of between 4.96 and 5.03 percent in a year's time, up from Thursday's implied 4.81-4.88 percent. Spot yuan closed at 7.5395 after moving mainly in a narrow range around 7.5400, compared with Thursday's close of 7.5384.
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