SHANGHAI: China's yuan drooped on Tuesday, pressured by a rise in the dollar globally, as traders say the greenback's fortunes will continue to determine the yuan's trajectory.
The dollar index rose overnight - rebounding from recent lows following the Federal Reserve's announcement of a new round of bond buying (QE3) - and it inched up further in early Asian trade.
China's central bank responded by setting its daily midpoint 58 pips weaker at 6.3208 per dollar on Tuesday. Spot yuan followed suit, weakening by 44 pips to 6.3217 at midday.
Traders are divided over whether global movements in the dollar or corporate dollar demand within China are the driving factor in the yuan's recent gains.
But the dollar/yuan rate has closely tracked the fall in the dollar index since July 25, when the yuan closed at a 2012 low of 6.3885, one day after the dollar index ended at a two-year high. The announcement of QE3 further weakened the dollar and pushed the yuan to a four-month intraday high on Monday of 6.3122.
"It's mainly QE3 and the dollar index. Their correlation is remarkably strong. If you put the two lines on a graph, it looks like one graph," said a trader at a Chinese shareholding bank in Shanghai.
After consistently trading weaker than the midpoint between mid-March and late August, spot yuan is now again trading stronger than the midpoint fix, in a sign that depreciation pressure has abated.
"Customer flow is certainly important, but right now the force is less than QE3," said a trader at a Chinese commercial bank.
But with the impact of QE3 now largely priced in, traders say the yuan has limited room to fall further and could even fall back if the eurozone debt crisis takes a turn for the worse. That would cause a rebound in the dollar index, which is weighted heavily towards the euro.
"There's a chance the spot rate could fall below 6.30, but the chances are relatively small," said the commercial bank trader.
In the offshore market, offshore yuan (CNH) futures launched on the Hong Kong stock exchange. Investor interest was cool, however, and trading volumes were thin. Futures prices largely tracked the prices for CNH forwards traded in Hong Kong's interbank market.
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