The yuan closed slightly lower against the dollar on Tuesday after the People's Bank of China (PBOC) set its midpoint at a two-month low in reaction to a dollar that traded close to a two-year high against the euro. Traders said the central bank is likely to set the official midpoint rate at a year-to-date low against the dollar soon, adding that this may occur as early as this week if the euro sinks below 1.25 versus the dollar.
In other news, the China Foreign Exchange Trade System announced on Tuesday that it would kick off yuan-yen direct trading on Friday, China's latest move to internationalise the Chinese currency. Spot yuan closed at 6.348 per dollar, slightly weaker than Monday's close of 6.3450.
Offshore one-year non-deliverable yuan forward contracts continued to trade at a premium to the spot price, changing hands at 6.4030 in the afternoon session for a discount of 1.2 percent to Tuesday's midpoint. Offshore spot yuan was trading around 6.3445 in late trade, slightly stronger than the onshore spot yuan. The PBOC set the day's midpoint, the base exchange rate from which the yuan can rise or fall by 1 percent on a given trading day, slightly weaker at 6.3262 compared with 6.3326 on Monday.
Tuesday's midpoint is the weakest fixing since March 15 and is within an arm's reach of the year-to-date low set on that day, at 6.3359. The PBOC has recently set a series of midpoints stronger than the yuan's trading level, as it seeks to keep the exchange rate relatively stable, but it has also signalled that it would tolerate a measured depreciation.