SHANGHAI: The yuan fell slightly against the dollar on Monday after the People's Bank of China set a weaker midpoint, even though the dollar index hit a nearly three-month low, underscoring the central bank's resolve to restrain sharp gains in the yuan.
The US dollar index appears to have lost its momentum since it hit a recent peak of 81.784 in mid-January, falling 0.6 percent on Friday.
"We're really surprised about the fixing," said a dealer at a Chinese commercial bank in Shanghai. "It seems like the central bank intends to keep the yuan in a narrow range."
Dealers said they were cautious about the yuan's upward trajectory near term due to uncertainties in the euro zone crisis and worries over slowing growth in the domestic economy, especially the country'sexports. The Chinese government will thus take a more defensive strategy in its exchange rate policy.
"Now we don't have a very clear direction, so the yuan will likely trade around the mid-point," the Chinese bank dealer said.
Market players also said the yuan had little chance of falling sharply as China faces strong international pressures for the exchange rate to be stronger as a cheap yuan has been blamed for causing global trade imbalances.
US Treasury Secretary Timothy Geithner said over the weekend that appreciation of China's yuan, also known as the renminbi, was 'welcome progress' and it was in China's interest to continue to allow its currency to rise.
Spot yuan was at 6.3011 against the dollar, edging down from Friday's close of 6.2978.
The central bank fixed its midpoint at 6.2985 on Monday compared with 6.2965 on Friday. It had set the fixing in a narrow range after letting it hit an all-time high of 6.2937 per dollar on Feb. 10, which markets construed as a goodwill gesture to the United States ahead of Chinese leader-in-waiting Xi Jinping's visit to that country earlier this month.
Traders said that compared with 2011, China was faced with an uncertain global market environment this year, mainly caused by the euro zone debt crisis.
In the offshore non-deliverable forwards (NDF) market, the benchmark one-year NDFs implied yuan appreciation of 0.23 percent, falling slightly from 0.31 percent they implied at Friday's close.
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