The yuan ended slightly weaker against the dollar on Tuesday but traded narrowly after the Chinese central bank reiterated that it wanted stability in the currency. In a quarterly monetary policy report released late on Monday, the central bank repeated that it would keep the yuan basically stable at a reasonable and balanced level while making the exchange rate more flexible.
With the global financial crisis continuing, traders think the central bank will maintain the 6.81 to 6.88 range that has prevailed since last July to minimise the risk of capital outflows while avoiding additional pressure on Chinese exports.
They believe the comment about more flexibility is, for now, a pro forma diplomatic response to US pressure for China to appreciate its currency, and that Beijing has no intention of increasing yuan volatility any time soon. In any case, US pressure on the exchange rate issue appeared minimal during Secretary of State Hillary Clinton's visit to Beijing at the weekend.
The central bank set the yuan's daily mid-point against the dollar at 6.8358 on Tuesday, down from Monday's 6.8337 but almost level with Friday's 6.8357, after a global rebound by the dollar on Monday night. Spot yuan closed at 6.8373 against the dollar on Tuesday, down modestly from Monday's finish of 6.8360.
East Asian currencies were weak against the dollar because of sliding stock markets and concern about economic growth. Taiwan's central bank urged importers late on Monday to hedge their foreign exchange positions, which might be a signal that it is ready to let the Taiwan dollar weaken further.
Taiwan's January export orders dropped a record 42 percent from a year earlier, in line with expectations, signalling that a slump in global demand is deepening and pointing to more dire exports figures from the rest of Asia. But China is expected to avoid getting involved in any cycle of East Asian currency depreciation unless the Chinese economy weakens more dramatically then expected.
In Monday's report, the Chinese central bank said downward pressure on growth continued, but added that its stimulus policies might still keep growth "stable and relatively fast". Offshore one-year dollar/yuan non-deliverable forwards were trading at 6.9430 late on Tuesday against Monday's close of 6.9300. They implied yuan depreciation of 1.54 percent over the next 12 months from the day's mid-point, against 1.39 percent implied on Monday.