China's yuan fell to its lowest level against the dollar in more than two years on Friday, raising questions about whether the world's second-largest economy will devalue its currency to avert a sharper economic slowdown. Central banks around the world are easing policy to support growth and prevent deflationary pressures from building up. With fears of a global currency war rising, all eyes in Asia are focused on what China will do as it grapples with inflation falling to 5-year lows and aggressive easing elsewhere.
On Friday, the People's Bank of China (PBOC) weakened the midpoint by nearly 100 pips to reflect strength in the global dollar index. The change was the biggest since last March when the central bank engineered a sharp drop in the currency to punish speculators. The People's Bank of China set the midpoint rate at 6.1475 per dollar prior to market open, weaker than the previous fix of 6.1379. The spot market opened at 6.2595 per dollar and was changing hands at 6.2698 near midday, 109 pips weaker than the previous close and 1.99 percent weaker than the midpoint. It was the lowest level since October 2012.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day. The yuan has been trading near the weaker end of the daily trading band in the holiday-shortened week after the Lunar New Year holiday and is on its way to end the month down about 0.3 percent, its fourth consecutive monthly loss. In the offshore market, the yuan was trading 0.21 percent weaker than the onshore spot rate at 6.2832 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.4, or 3.95 percent weaker than the midpoint.
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