SHANGHAI: The yuan fell slightly against the dollar on Wednesday and failed to match a record high mid-point set by the People's Bank of China as weak prospects for a yuan rise early next year nudged firms to retain dollars, traders said.
The central bank fixed the dollar/yuan mid-point at an all-time high for the second straight day on Wednesday, an apparent signal it wants the to yuan rise a little more at the end of 2011 to make the currency's full-year appreciation bigger, traders said.
But many companies were reluctant to sell their dollars on hand, believing the yuan has little room to appreciate after the new year starts with China's export growth slowing amid a weak global economy, mainly caused by the euro zone crisis, traders said.
That contrasts with the end of last year, when nearly all corporates rushed to cash dollars into yuan in anticipation of appreciation.
Traders said Tuesday's decision by the US Treasury not to label China a currency manipulator had no impact on trading.
The Treasury rapped China for not moving quickly enough on exchange rate reforms after some US politicians have repeatedly argued that China has gained an unfair competitive edge in global markets by keeping the yuan artificially low to boost exports.
"Everyone understands that neither the United States nor China will go so far as to start a trade war on the currency front," said a trader at a Chinese commercial bank in Shanghai.
"So the decision is no surprise to us and it has no impact on trading."
LOW EXPECTATIONS FOR 2012
Spot yuan traded around 6.3240 against the dollar early on Wednesday, down slightly from 6.3226 at the close on Tuesday and nearly 100 pips weaker than the PBOC's mid-point.
The central bank set the dollar/yuan mid-point at an all-time high of 6.3146 on Wednesday, toppling Tuesday's historical high of 6.3152.
It appears to be using the same tactic it used at the end of last year, when it let the yuan appreciate slightly to cope with US pressure for the currency, officially called the renminbi, to rise.
The central bank engineered a 0.5 percent rise in the last two weeks of 2010, before letting the currency pull back in the new year. The yuan, which gained 3.6 percent in 2010, has appreciated 4.2 percent so far this year.
Traders believe the yuan will likely remain stable in the first few months of 2012 as China needs time to gauge the impact of global economic weakness on its exports and growth.
For all of 2012, the yuan is still expected to appreciate, as China is faced with US pressure to rebalance bilateral and world trade while it continues to record trade surpluses.
But its appreciation rate is expected to slow to around 3 percent in 2012, with most of the rise expected in the second half.
Offshore, benchmark one-year non-deliverable forwards (NDFs) rose to 6.3820 on Wednesday against 6.3780 at the close on Tuesday, implying that the yuan will depreciate 1.06 percent in 12 months from Wednesday's PBOC mid-point, compared with a 0.99 percent fall implied on Tuesday.
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