China's yuan closed slightly softer on Monday, but the central bank's restrained response to the fall in the Japanese yen signalled that China is unlikely to weaken its currency aggressively to blunt the impact of a weaker yen. The yen has reeled since Thursday, when the Bank of Japan unleashed its most intense monetary stimulus effort yet, promising to inject about $1.4 trillion into the economy in less than two years. But China's response was muted on Monday.
The People's Bank of China (PBOC) set its daily midpoint only 0.07 percent weaker than last Wednesday, the last day of trading before markets closed for the two-day holiday for tomb sweeping. Traders said the impact of the yen's weakness on the PBOC's midpoint seemed to be offset by the strengthening of the euro. "The midpoint was set weaker today, but it wasn't as weak as a lot of people were expecting. It looks like the central bank isn't planning to just blindly follow the yen weaker," said a trader at a foreign bank in Shanghai. Spot yuan hit a record high of 6.1986 per dollar last Tuesday after the central bank set its strongest midpoint ever at 6.2586. The spot rate has closely followed the trend in the PBOC's fixings in recent months, as the central bank has used its midpoint to restrain the pace of appreciation.
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