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Spot yuan eased against the dollar on Monday while data issued by the Bank for International Settlements (BIS) over the weekend showed that the yuan fell slightly against a trade-weighted basket of currencies. Offshore one-year dollar/yuan non-deliverable forwards (NDFs) hit an intraday high of 6.8230 bid late on Monday.
Implying the lowest yuan appreciation since late March amid signs that the Chinese central bank would keep the yuan stable in the near term. The benchmark NDFs latest level implied yuan appreciation of only 0.15 percent over the next 12 months from the day's spot mid-point, or reference rate, set by the Chinese central bank. Spot yuan closed at 6.8365, down slightly from Friday's close of 6.8342 after the central bank set the yuan's daily mid-point at 6.8333 versus the dollar, down marginally from Friday's 6.8328.
BIS data showed that the yuan's nominal effective exchange rate (NEER), its value against a trade-weighted basket of currencies, fell 0.5 percent in July, apparently led by global dollar weakness. While the Chinese central bank kept the yuan's value little changed versus the dollar, the US dollar index fell 2.26 percent in July, meaning the yuan depreciated against major global currencies in line with the fall in the US currency.
As the dollar is estimated to have weighting of around 70 percent of China's trade-weighted basket of currencies, the dollar's global fall in July helped to push the yuan lower versus the basket.
Over the past year, the People's Bank of China has maintained the yuan at a virtual peg to the dollar, keeping the Chinese currency in a 100-pip range as the global crisis hurt the key export sector and caused a fall-off in foreign direct investment.
The outlook appears to have changed slightly in the second quarter of this year when China's economy showed some signs of improvement. But China's latest economic data for July, mostly announced last week, showed that the country's economic recovery, while still intact, was taking a breather, leading traders to believe that the central bank might not change its stable yuan policy at least for several more months.
In a further sign that the base of China's economic recovery may not be solid, the Ministry of Commerce said on Monday that China's foreign direct investment (FDI) fell 35.7 percent in July from a year earlier, steeper than June's 6.8 percent drop. "Today's FDI data and last week's exports all show China's economic recovery still takes time," said a dealer at a European bank in Shanghai. "So the central bank will stick to its stable yuan policy."

Copyright Reuters, 2009

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