The People's Bank of China fixed its mid-point weaker to reflect a rally in the US Dollar Index overnight but dealers said the fixing also appeared to be aimed at creating two-way trading instead of one-way appreciation.
Still, the government seems confident that China's growth will not be interrupted by policy moves, such as yuan appreciation, with the Vice President Xi Jinping saying on Friday that the country's economy would not experience a hard landing.
And in a string of steps to boost the yuan's global status, Vice-Premier Li Keqiang announced earlier this week China would soon allow foreign investors to use the yuan to buy up to 20 billion yuan ($3 billion) worth of securities.
"There are no signs that the recent quickened pace of yuan appreciation will slow down any time soon, so the market sees the yuan hitting another slew of record highs in the near term," said a trader at a European bank in Shanghai.
"The only thing the market is waiting for is a sign from the PBOC for another leg of yuan appreciation."
Spot yuan closed at 6.3930 per dollar, down from 6.3877 at Thursday's close but still within arm's reach of its trading peak of 6.3820 hit on Tuesday.
It has now appreciated 6.77 percent since it was depegged from the dollar in June 2010 and 3.07 percent so far this year.
The PBOC surprised the market last week by letting the yuan rise at its fastest weekly pace since the global financial crisis in 2008, sparking speculation that China might widen the yuan's trading band, use the currency as a key tool to fight inflation or let it appreciate versus a trade-weighted basket.
CAUGHT UNPREPARED
But on Friday, the central bank fixed the mid-point weaker at 6.4032 from Thursday's 6.3942 after having pulled the yuan back slightly since Tuesday's record high of 6.3925.
The fixing is the central bank's base rate from which the yuan can move 0.5 percent in either direction and an indication of the government's intention for the currency's movements.
"Banks and clients were caught unprepared for a relatively steep weakening of the yuan today after its surprisingly quick appreciation last week," said a dealer at a Chinese commercial bank in Shanghai. "There was an extraordinarily big demand for covering dollar short positions this morning."
Echoing onshore weakness, one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.2895 in late trade, up from 6.2850 at Thursday's close.
Their implied yuan appreciation in a year's time fell to 1.80 percent from 1.88 percent.
The benchmark NDFs also staged a rebound this week after its dive last week to imply the strongest expectations of yuan appreciation in 12 months since the global financial crisis.
Copyright Reuters, 2011