China's yuan ended down against the dollar on Tuesday after the central bank set a low mid-point to slow its gains in the wake of last week's interest rate hike, but traders expected further near-term strength. The yuan closed at 7.5625 to the dollar, up from an intraday low of 7.5656 but down slightly from Monday's close of 7.5620.
Before the start of trade, the People's Bank of China fixed its daily mid-point at 7.5725 to the dollar, below Monday's 7.5642 and the weakest mid-point in a week and a half. "Even with a low midpoint, the yuan by the end of trading was basically unaffected. I think this shows the strength of the yuan, which should continue to appreciate throughout the week," said a trader at a major Chinese bank.
Dealers said weakness in the dollar against other currencies and the interest rate hike were supporting the yuan, with a trader at an international bank saying she was confident-year non-deliverable forwards (NDFs) quoted the yuan at 7.1500/7.1550 at 0933 GMT, indicating appreciation of 5.83 to 5.91 percent in a year's time from Tuesday's mid-point - up significantly from Monday's 5.60 to 5.67 percent and last Tuesday's 4.64 to 4.69 percent.
The US currency was hovering near a record low against the euro on Tuesday and slipped to a two-month low versus the yen. China announced a 0.27 percent increase in interest rates on Friday after high inflation data for June fuelled worries about an overheating economy.
While some economists believe that this will be the last interest rate hike for the year, others think there will be more to come, which would push the yuan to appreciate faster.