SHANGHAI: The yuan closed at its strongest level in six weeks on Friday amid a slide in the dollar globally and resurgent yuan demand, with traders saying a floor for the currency has emerged around 6.37 per dollar.
Spot yuan ended at 6.3585, 0.1 percent stronger than Thursday's close. That compared to a 0.4 decline in the dollar index since Thursday's close.
The central bank on Friday morning set its daily midpoint at 6.3449, 0.1 percent stronger than Thursday's fix.
Traders expect the currency to fluctuate in the 6.35-6.38 range over the next several weeks.
Strong dollar demand for much of 2012 has caused the yuan to fall 1.0 percent this year, but it has regained its footing recently.
Safe haven demand for dollars, which spiked as the euro crisis worsened in July, has faded, while the euro, which tends to move in sync with the yuan, has stabilised.
With the dollar off the two-year high it reached on July 25, dollar hoarding by Chinese corporates has slowed. The yuan has strengthened consistently since hitting its own year low of 6.3967 on July 25.
"Whenever the rate floats above 6.37, it has a psychological effect, and customers with dollars in hand feel like it's a good time to buy yuan," said a trader at a joint-stock bank in Shanghai.
Though the yuan continues to trade weaker than the central bank's midpoint, as it has since mid-March, the gap has narrowed this month, and traders say order flow has become more balanced between dollar buying and selling.
"It's not like before when dollar demand was really very high. Now the flows are basically equal," said a trader at a city commercial bank in Shanghai.
"Also the central bank isn't trying to push down the rate (strengthen the yuan) anymore. Now they're basically following the market," he said.
In June and July, when dollar demand was at its strongest amid safe haven demand stemming from the euro crisis, the People's Bank of China (PBOC) often set the midpoint significantly stronger than the spot level. Traders at the time interpreted the fixing as a signal that the PBOC would not permit the yuan to fall too far, too fast.
The midpoint is the base rate that the central bank uses to flag its intentions for the yuan and from which the exchange rate is allowed to rise or fall by 1 percent in a single day.
In the offshore market, one-year non-deliverable forwards were bid at 6.4453 late on Friday afternoon, implying 1.3 percent depreciation over the next twelve months, up slightly from the 1.2 percent depreciation implied at Thursday's close.
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