SHANGHAI: China’s yuan slipped to a three-month low against the dollar on Friday, breaching a key threshold, after the central bank set a much weakened midpoint guidance, with traders expecting further downside due to an economic slowdown.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.8065 per dollar, 263 pips or 0.39% softer than the previous fix of 6.7802, the weakest since Sept. 30, 2020.

That dragged the spot market past the psychologically important 6.8 per dollar level. The onshore yuan opened at 6.8050 per dollar and fell to a low of 6.8150, the softest level since May 13.

It traded at 6.8103 at midday, 233 pips weaker than the previous late session close. A late night close at this level would mean a loss of about 1% to the dollar for the week, its worst weekly performance since mid-May.

Its offshore counterpart followed suit to touch a three-month low of 6.8288, before last fetching 6.8250.

Currency traders and analysts said a firmer dollar and weaker domestic economic fundamentals both contributed to the yuan’s declines.

The selling pressure on the yuan has grown since the PBOC surprised markets by cutting two key interest rates earlier this week, traders say.

“Due to intensified divergence in monetary policy between China and the United States”, US yields were trading at a higher premium over their Chinese peers, piling depreciation pressure on the yuan, analysts at OCBC Wing Hang Bank said in a note.

The PBOC is set to take more easing steps, though policy insiders and analysts say it faces limited room to manoeuvre due to worries over rising inflation and capital flight.

A Reuters survey forecast the central bank will cut its benchmark lending rates on Monday, underlining the mounting pressure on the economy.