SHANGHAI: The yuan fell slightly against the dollar on Friday after the Chinese central bank set a weaker mid-point, and as worries that the euro zone might be shrinking faster than thought continued to fuel buying in the US currency.
Market watchers have growing doubts over what a European summit can achieve to lift Europe from a debt crisis, while the European Central Bank poured cold water on wishes it would buy up more bonds of debt-laden euro zone states.
Surveys earlier this week showed that Europe's debt crisis might have pushed its economy into a steeper contraction than earlier thought and growth in China was cooling.
A shortage of dollars onshore amid year-end demand for the currency also combined to push the yuan to the lower end of its daily trade limit for the eighth straight day.
But analysts and dealers said the yuan had limited potential to fall sharply as China had indicated via its daily mid-point fixing that it seeks to keep the yuan stable, especially amid the current global market volatility.
"The Chinese central bank has set the mid-point at such a high level, it has already limited the downtrend in spot yuan. Actually, the Chinese currency has not depreciated ," said Liu Dongliang, a senior analyst in China Merchants Bank.
Indeed, spot yuan has risen 160 pips from eight trading day ago, compared with Friday's midday level of 6.3629. It was down slightly from 6.3619 at Thursday's close.
The yuan has still risen 3.56 percent so far this year and 7.28 percent since it was depegged in June 2010.
Before trading began, the PBOC fixed the day's mid-point at 6.3352, weaker than Thursday's 6.3319. The central bank uses the fixing to express the government's intention for the yuan's daily movement.
Benchmark offshore one-year dollar/yuan non-deliverable forwards (NDFs) have largely been forecasting yuan depreciation in a year's time since late September, reversing a trend of appreciation since the yuan's revaluation in July 2005.
One-year NDFs were bid at 6.4030 on Friday against 6.4050 at the close on Thursday, implying that the yuan would depreciate 1.07 percent in 12 months from Thursday's PBOC mid-point, compared with a 1.10 percent fall implied on Thursday.
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