SHANGHAI: China's yuan edged lower against the dollar on Thursday in spite of a stronger official midpoint as the market showed doubt that the yuan has potential to appreciate further following its recent gains.
Spot yuan was trading at 6.1289 against the dollar, down from 6.1267 at Wednesday's close. If the Chinese currency does not rebound in the afternoon, Thursday will be the third straight day it has fallen.
Before Thursday's trade began, the People's Bank of China (PBOC) set the yuan's midpoint at 6.1820, slightly stronger than Wednesday's fixing of 6.1856, signalling the government might still let the currency appreciate for now.
The yuan, which usually follows the direction of the central bank's midpoint, is allowed to rise or fall 1 percent in a day from the base rate.
"The market is increasingly divided on whether the yuan has potential to appreciate further, with many of us believing its recent rally has already gone too far," said a trader at a Chinese commercial bank in Shanghai.
"Some corporates may have accumulated dollar-short positions in the yuan's rally over the past two months, and there are signs that dollar sales are ebbing, or even dropping slightly of late," he said.
The central bank has used the midpoint to guide the yuan to multiple record highs since early April as the government appears to be gradually moving to create conditions for a more flexible exchange-rate regime.
By letting the yuan rise, the PBOC hopes to find the range where supply and demand for dollars is balanced, traders said, but this has yet to be found as the currency continues to trade near the strong end of the trading band.
<Center><b><i>Copyright Reuters, 2010</b></i><br></center>
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