China's yuan closed up against the dollar on Wednesday, bouncing from early losses and ending a two-day correction of last week's rally, while non-deliverable forwards set a record for implied 12-month yuan appreciation for a fourth day in a row.
Onshore dealers said they expected the yuan to rise at a slightly faster pace in the short term after the Chinese central bank indicated last week, in a shift of policy, that it would use currency appreciation to fight inflation.
But they said any yuan gains would be far from dramatic, as the central bank stuck to a gradual approach that would include engineered set-backs such as this week's steep retracement.
The central bank set its daily mid-point reference rate at 7.4321 to the dollar before trade began on Wednesday, marginally weaker than Tuesday's unexpectedly low 7.4309. The yuan closed at 7.4253 to the dollar, reversing an early drop that took it to an intraday low of 7.4500.
The central bank's much lower mid-point on Tuesday triggered the yuan's biggest one-day drop since its 2005 revaluation. The currency ended on Tuesday at 7.4335, down 0.286 percent from Monday, after a 0.6 percent gain last week, or an annualised rate around 20 percent. Dealers said the break in yuan appreciation showed the central bank had no intention of tolerating a dramatic rise in the currency despite signals that it would pursue a more flexible exchange rate policy to fight inflation.
"The latest pull-back guided by the central bank means the authorities will continue a gradualist approach to yuan appreciation, drawing on a lesson from other countries that too fast a rise in the exchange rate may hurt the economy," said economist Wang Haoyu at First Capital Securities.