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The yuan edged lower against the dollar on Thursday as the US currency extended its recent gains on global markets, fuelled by worries about a worsening economy that spurred investors to liquidate risky assets. The Chinese central bank set the yuan's daily mid-point against the dollar at 6.8368 versus Wednesday's 6.8339, weaker for a third straight day.
The spot yuan rate closed at 6.8354 to the dollar compared with the previous close of 6.8341, after moving in a narrow range of 6.8340 to 6.8380. The yuan's recent weakness, however, has lagged the global strength in the dollar, which jumped to a two-year high versus the euro and a five-year peak against sterling overnight. While the central bank has kept the yuan-dollar rate relatively stable, fearing that rapid depreciation would spur capital outflows, dealers pointed to the potential for depreciation in the future.
"The market seems to have come to terms with the idea that the yuan's long-term uptrend is not sustainable," said a dealer with a major Chinese bank. "It is quite likely that the central bank will allow its currency to depreciate someday if the country's economy slows further and more export-oriented companies go into bankruptcy."
In the offshore non-deliverable forwards (NDF) market, one-year dollar/yuan NDFs rose sharply to 7.0700 by late trade, up from 6.9650 at Wednesday's finish. The NDFs' latest level implied yuan depreciation of 3.30 percent against the dollar over the next 12 months from the day's spot mid-point, up significantly from 1.88 percent implied at Wednesday's close.
The NDFs began to imply 12-month yuan depreciation for the first time in five years on September 16. After posting weaker-than-expected third-quarter economic growth on Monday, the government moved quickly on Tuesday by pledging to boost infrastructure investment and raising export tax rebates.

Copyright Reuters, 2008

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