Yuan falls on strong month-end dollar demand

SHANGHAI: The yuan edged down against the dollar on Friday even though the People's Bank of China set the mid-point slightly higher, as dealers cited strong dollar demand around the month-end and the dollar index hit a two-month high.

The yuan is expected to stay trapped in tight ranges in the near term amid the current climate of avoiding risk as the euro zone grapples with a deepening debt crisis.

"Due to the European crisis, risk-aversion sentiment dominates the market," a dealer at Chinese commercial bank in Shanghai said. "The dollar will still have the main impact, which means the strong US currency will drag down the yuan a bit," the dealer said.

The dollar index has rallied around 3.5 percent since early this month, hitting a near two-month high on Friday as contagion fears for the European debt crisis keep growing.

Dealers said spot yuan may move between 6.35 and 6.37, as most of the major banks had reached whole-year volume and profit targets in yuan trade for 2011.

Spot yuan was trading at 6.3715 versus the dollar at midday, down from Thursday's close of 6.3680. The yuan has now appreciated 7.1 percent since it was depegged from the dollar in June 2010, and 3.40 percent since the start of this year.

Before trade began, the PBOC set the yuan's daily mid-point at 6.3554 against the dollar, slightly firmer than Thursday's 6.3570. The central bank appears to have halted the yuan's appreciation since early November, when the mid-point hit a record high of 6.3165.

JPMorgan's daily index of the yuan's nominal effective exchange rate (NEER) has hit a 2-1/2 year high, as the yuan has held steady against the dollar even as the dollar has strengthened against major currencies such as the euro, while the dollar index hit two-month high of 79.3.

Offshore, one-year non-deliverable forwards (NDFs) were bid at 6.4000 on Friday, up slightly from 6.3880 at the previous close, implying that the yuan would fall 0.70 percent in 12 months from Friday's PBOC mid-point, compared with a 0.51 percent depreciation implied on Thursday.