China's yuan fell against the dollar in the spot and offshore forwards markets on Monday in response to global dollar strength, as the Chinese spot market reopened after a week-long holiday. Spot yuan closed at 6.8487, down moderately from its January 23 close of 6.8380, after the Chinese central bank set the day's yuan mid-point slightly lower at 6.8397 against 6.8380.
Offshore one-year dollar/yuan non-deliverable forwards rose as high as 7.09, near the top of the 6.95-7.10 range of the past six weeks, from Friday's finish of 7.06. Monday's high implied yuan depreciation against the dollar from the day's mid-point over the next 12 months of 3.53 percent, up from 3.14 percent implied at the close on Friday.
Traders expect the central bank, caught between the weakness of China's export sector and authorities' desire to avoid large capital outflows from the country, to continue using its mid-point system to keep spot yuan in the 6.82-6.86 range of the past six weeks. "Given the uncertainties facing China's economy, I think the central bank will maintain a stable foreign exchange market, as it has in the past months," said a Chinese bank trader in Shenzhen.
Few traders think US diplomatic pressure is likely to produce significant appreciation of the yuan any time soon, despite incoming US Treasury Secretary Timothy Geithner's remark last month that China was manipulating its currency.
Premier Wen Jiabao said at the weekend that China's future purchases of US Treasuries would depend on its need to protect the value of its foreign investments - a reminder that Beijing has plenty of ammunition in any economic dispute with Washington.
A US lawmaker closely involved in US-China issues said on Thursday that President Barack Obama was expected to contact his Chinese counterpart soon and assure Beijing that Washington was not seeking a "currency war". Representative Mark Kirk, co-chair of the US-China Working Group, said he and others in the bipartisan congressional group were told by administration officials that "the president will undercut the anti-currency message pretty directly."