yuan-SHANGHAI: China's yuan fell against the dollar on Wednesday after the central bank set a weaker midpoint, but losses were limited as corporates struggled to cover long dollar positions in thin trading.

 

The People's Bank of China (PBOC) set its daily midpoint at 6.2902, softer than Tuesday's fix of 6.2852, in response to a rise in the dollar index overnight.

 

But spot yuan moved firmly to the strongest level permitted by the central bank for the fifth straight session. On Wednesday that level was 6.2273 per dollar, slightly weaker than Tuesday's record high close of 6.2223.

 

The PBOC allows the exchange rate to rise or fall 1 percent from the midpoint it sets each day.

 

The yuan has now hit its upper limit for 22 of the last 25 sessions, creating a deadlock in the market that has decimated trading volumes.

 

Daily turnover in the spot market averaged $13.9 billion in the first three quarters of this year, central bank data shows. But volume has plummeted to $5.0 billion on average over the last four sessions.

 

Traders say the deadlock will only end if the central bank either injects more yuan liquidity into the market through dollar purchases -- essentially acting as dollar buyer of last resort -- or sets stronger midpoints, thereby granting the spot rate more room to appreciate.

 

But traders are at a loss to predict which of these options the central bank will take or when. Some say the current pattern of spot yuan slamming against its top-side limit every day could continue through the end of the year.

 

Companies accumulated significant long dollar positions earlier this year to protect themselves against a fall in the Chinese currency, which touched a year low of 6.3967 in late July as the Chinese economy sputtered and the euro zone debt crisis fueled safe-haven demand for the dollar.

 

But the dollar has since fallen back on an improved outlook for Europe and the Federal Reserve's latest round of bond buying. China's export growth and other macro indicators have also revived.

 

The yuan has risen 1.1 percent in 2012.

 

On Tuesday the US Treasury again declined to officially label China a currency manipulator in its semi-annual report on global currencies, but did renew its claim that the yuan is "significantly undervalued".

 

Chinese Foreign Ministry spokesman Hong Lei rejected that charge on Wednesday.

 

"In recent years, the ratio between China's GDP and the current account surplus has decreased on a daily basis. The renminbi's exchange rate is in equilibrium. There is no so-called problem that the exchange rate is undervalued," he told reporters in Beijing.

 

"We hope that the US side can appropriately deal with trade and economic issues, including the renminbi exchange rate," Hong added.

 

Copyright Reuters, 2012

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