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China's yuan fell sharply against the dollar on Friday, pushed down by outflows of funds despite a higher yuan mid-point set by the central bank and renewed weakness of the dollar against the euro. The Chinese currency closed at 7.4976, down from its close of 7.4820 on Thursday, when it hit a fresh post-revaluation high.
The 0.21 percent fall was the yuan's fourth biggest drop since its revaluation in July 2005. The central bank set a higher mid-point of 7.4810 before trade began, but the yuan never traded above it. Dealers said fund outflows for investment - some apparently going to Hong Kong, where the stock market continues to surge despite a pull-back by China's domestic stock market - dominated the forex market.
The yuan then fell sharply in the last half-hour of trade, as far as a low of 7.5040, because of several big orders for dollars from large Chinese banks, dealers said. "Some large banks appeared to need dollars at the end of the week, and their selling of yuan pushed it down," said a dealer at a major Chinese commercial bank.
Thursday's news that Industrial & Commercial Bank of China is buying 20 percent of South Africa's Standard Bank for $5.6 billion added to pressure on the yuan. It is unclear when fund flows related to the deal will go through, but other foreign investment deals by Chinese financial institutions may be announced in coming months, analysts say.
Dealers said the yuan was likely to move mainly between 7.48 and 7.50 next week, with the potential to rise above 7.48 if the euro continues hitting fresh highs against the dollar. Traders believe the Chinese central bank will allow slightly faster yuan appreciation in coming weeks to ensure the yuan ends this year with a rise of about 5 percent against the dollar. It is up 4.1 percent so far this year.

Copyright Reuters, 2007

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