SHANGHAI: China's yuan weakened to touch one-week lows against the dollar on Friday after the central bank set a weaker fixing, and as expectations of a strong US economic recovery put the greenback on course for its best weekly gain in three months.
Traders said that dollar selling by corporates ahead of the Lunar New Year holiday nevertheless limited the downside for the yuan, which they expect to continue to fluctuate within a range around US dollar index moves.
Before the market open, the People's Bank of China set the midpoint rate of the yuan's daily trading band at 6.471 per dollar prior, more than 100 pips weaker than the previous fix of 6.4605.
Spot yuan opened at 6.4691 per dollar and touched 6.4822 per dollar, its weakest point since Jan. 28, before paring losses to 6.4767 by midday. That was slightly weaker than a late session close on Thursday of 6.4720.
The offshore yuan dipped against the greenback to 6.4835 per dollar.
"I feel like the weakening of the midpoint shows regulators hope the yuan will have two-way fluctuations," said a trader at a foreign bank. He added that the market has been cautious in recent days as investors wait for clearer signs of the new US administration's approach to relations with China.
US President Joe Biden on Thursday signaled a more aggressive approach to China, calling Beijing "our most serious competitor" in a speech promising a new era after the scattershot foreign policy of his predecessor.
The yuan's weakness on Friday also came amid a bout of dollar strength on investor views that the US economic recovery is on relatively strong footing.
Democrats in the US Senate were poised for a marathon session aimed at overriding Republican opposition to a $1.9 trillion COVID-19 relief proposal.
The global dollar index rose to 91.567 on Friday from Thursday's close of 91.527.
Analysts nonetheless see room for a stronger yuan in the medium term.
"The PBoC would like to stabilise its currency but it would be complicated given current inflows following the inclusion of China bonds in global bond index," Natixis economists Jianwei Xu and Nordine Naam said in a note, adding that China is unlikely to strongly intervene the forex market due to its Phase 1 agreement with the US.
They said they expect the dollar to weaken this year against most currencies and expect the yuan to trade at 6.30 per dollar within one year.