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The yuan fell against the dollar in the spot market and offshore forwards on Wednesday after the Chinese central bank set a weaker mid-point, signalling that it wants stability and reducing expectations for a new round of yuan appreciation.
Before trade began, the central bank set its daily yuan mid-point against the dollar at 6.8129, down from Tuesday's 6.8009, which was the reference rate's highest level since the yuan was revalued in July 2005.
"Yesterday's surprisingly high mid-point had caused part of the market to think China might resume the trend of yuan appreciation against the dollar seen over the past three years," said a dealer at a North American bank in Shanghai.
"But the mid-point's pull-back today shows clearly that the central bank wants a stable, not a rising yuan," he said, adding that the market now believed the yuan was unlikely to breach the psychologically important 6.8000 level any time soon.
Spot yuan finished at 6.8237 against the dollar from Tuesday's close of 6.8135. It hit an intra-day high of 6.8170 in early trade but remained below the central bank's mid-point and was well down from Tuesday's post-revaluation traded peak of 6.8099.
When the dollar was rising globally between mid-July and mid-September, the Chinese central bank used its mid-point system and indirect intervention when necessary to keep the yuan almost stable against the dollar, and far outperforming most other currencies. Offshore, one-year dollar/yuan non-deliverable forwards rose to 6.7850 in late trade on Wednesday against Tuesday's close of 6.7650. Their latest level implied yuan appreciation of 0.41 percent against the dollar over the next 12 months from the day's mid-point, down from appreciation of 0.53 percent implied at the close on Tuesday.

Copyright Reuters, 2008

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