China's yuan closed lower against the dollar on Monday but the yen's strength in foreign markets helped the Chinese currency offset some downward pressure from the low reference rate set by the central bank. Before the start of Monday's trade, the People's Bank of China fixed its daily mid-point at 7.5824 to the dollar, weakening sharply from Friday's 7.5697.
Had the yuan traded around the mid-point level as it typically does, it would have fallen 0.266 percent from Friday's close, the second-biggest decline since the yuan was revalued and depegged from the dollar in July 2005.
But the yuan showed a muted reaction to the mid-point as it closed at 7.5674 to the dollar, down only modestly from Friday's close at 7.5623. It closed before China raised banks' required reserves for the ninth time since June 2006 in an attempt to keep a lid on credit and investment growth.
"Traders think the mid-point is too low for the market level. The yen may have also helped the yuan remain relatively strong," said a trader at an international bank, adding that the Chinese currency would likely to end the week around 7.56. On the offshore market, one-year non-deliverable forwards (NDFs) quoted the yuan at 7.1420/7.1460, indicating appreciation of 6.11 to 6.17 percent in a year's time from Monday's mid-point, up significantly from Friday's 5.85 to 5.92.
The yen hit a three-month high against the euro and a two-month high against the Aussie during early trading on Monday. As a key Asian currency, the yen's movements typically give the yuan some hints on the Chinese currency's future direction.
The yuan rose a modest 0.1545 percent last week, after it slipped 0.0594 the week before in the wake of a weekly record gain of 0.4144 percent during the second week of July.
Many traders, who had believed the yuan could rise at a relatively faster pace at the end of July due to US Treasury Secretary Henry Paulson's four-day visit to China this week, are now saying that the yuan could even fall on Monday and Tuesday.
"The central bank seems trying to prevent the yuan from appreciating too rapidly," said a dealer at a major Chinese bank. The United States is the key nation among others to place pressure on China to allow its currency to rise faster. On his plane on the way to China, Paulson said on Sunday that the Chinese needed to allow the yuan to appreciate more quickly, though he also noted the currency had already appreciated at least 9 percent since the revaluation.
The US Senate Finance Committee passed a bill last week that would allow companies to seek anti-dumping duties against products from countries that have "fundamentally misaligned" currencies and eventually intervention by the Federal Reserve. Some US lawmakers and manufacturers have said that the Chinese currency is deliberately undervalued by 25 to 40 percent, keeping Chinese products cheap in US consumer market.