HONG KONG: China's yuan fell against the dollar on Tuesday, after the central bank set a weaker official midpoint to reflect strength in the dollar index.
The People's Bank of China set the midpoint rate at 6.128 per dollar prior to market open, weaker than the previous fix of 6.1255.
The spot market opened at 6.2000 per dollar and was changing hands at 6.2022 near midday, 7 pips weaker than the previous close and 1.21 percent weaker than the midpoint. It traded in a tight range between 6.2033 and 6.2000.
The spot rate is allowed to trade with a range of 2 percent above or below the official fixing on any given day.
The dollar held gains against its peers on Tuesday, drawing support as the euro slid overnight on increasing worries that Greece could default on its debt and eventually exit the single currency.
The offshore yuan was trading 0.05 percent stronger than the onshore spot at 6.199 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.2795, or 2.41 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate. Since the trading band was widened last year to 2 percent in either direction, corporates have grown warier of using the NDF to hedge given the basis risk inherent in them.
As a result the market has lost liquidity and has frequently proven an unreliable measure of market sentiment.
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