Yuan ends lower, but further gains seen

The yuan closed down slightly versus the dollar on Tuesday after the People's Bank of China set a weaker mid-point, following a slight rebound in the dollar index after the passage of a last-minute deal to raise the US borrowing limit. Traders said yuan appreciation appears to be still on the cards, although some narrow-band fluctuations may be seen in the near term, due to the movements of global currencies.
"It is only a short-term correction, as the yuan has climbed relatively fast over the past month, and the currency will continue on its ascending path for the rest of this year," said a trader at a medium-sized bank in Shenzhen. Spot yuan closed at 6.4382, weaker than Monday's close of 6.4340. It has now appreciated 6.03 percent since it was depegged from the dollar in June 2010 and 2.35 percent so far this year.
Before trade began the PBOC fixed the yuan's mid-point at 6.4419 against the dollar, weaker than Monday's record high of 6.4399. Dealers said a weaker-than-expected recovery in the US economy and lingering fears over a US credit downgrade could drag on the dollar in the future.
"The deal having been struck does not represent that the US debt issue has been solved thoroughly," said a trader in a state bank in Shanghai. "And a weakening dollar may add fuel for yuan appreciation in coming months," he added. Initial euphoria about the US Congress agreeing on a deal to raise the government's statutory borrowing limit faded as investors worried that the country might still lose its triple-A credit rating even though the risk of a default appeared to be off the table.
Chinese economists also said US debt woes still threaten the global economy despite a last-minute deal struck by the White House and political party leaders, China's main official newspaper reported on Tuesday. Offshore, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3670 in late trade, weaker than 6.3600 at the previous day's close. Their implied yuan appreciation in a year's time fell to 1.18 percent from 1.26 percent.