SHANGHAI: China's yuan slipped against the dollar on Monday in line with the central bank's weaker mid-point fixing, and the currency is expected to move mainly in a virtual peg of 6.30 to 6.40 to the dollar in coming weeks.
The government is forecasting a sharp slowdown in the growth of its foreign trade in 2012, but is also predicting a steep fall in capital inflows for the year -- a sign that could see the yuan at status quo to balance the conflicting factors.
That means the government will not want the yuan to appreciate sharply so that it exerts further pressure on its exports, and neither will it want the currency to depreciate sharply that it encourages capital outflows, traders said.
"It seems unlikely that China will let the yuan appreciate much until the euro zone debt crisis is largely over," said a dealer at an Asian bank in Shanghai.
"It appears not to want the yuan to depreciate as well, partly because it is still under pressure from the United States to let the yuan appreciate to balance bilateral trade."
Spot yuan was trading at 6.3149 to the dollar around midday, slightly weaker than Friday's close of 6.3066.
The currency has dropped 0.33 percent so far this year as the People's Bank of China fixed a slew of weaker mid-points after letting it hit a record trading high of 6.2919 at the start of this year.
On Monday, the PBOC set its fixing at 6.3306 against Friday's 6.3201, with traders saying the dollar's recent global strength offered the Chinese central bank an easy excuse to pull the yuan back slightly.
The US dollar index has hit repeated one-year highs so far this year, touching its latest peak of 81.784 on Friday and trading within arm's reach of that level in early Asian trade on Monday as the euro zone debt crisis has largely driven investors away from riskier assets.
FOREIGN TRADE AND INFLOWS
Over the weekend, the official Xinhua news agency quoted a senior economic planning official as saying that China aimed to increase foreign trade by around 10 percent this year, down from 22.5 percent in 2011, as it faces a "grim" outlook for exports.
Zhang Xiaoqiang, deputy director of the National Development and Reform Commission, told a forum that financial products should be developed to help exporters hedge against exchange rate fluctuations, while the value of the yuan should be kept stable.
On Monday, the China Business News quoted Yi Gang, head of the State Administration of Foreign Exchange (SAFE), as saying that China would continue to see net foreign exchange inflows this year, but the amount will drop sharply compared with previous years.
Earlier, central bank data showed that yuan liquidity derived from foreign currency purchases by the central bank and other financial institutions dropped for the third consecutive month in December -- a sign of slowdown of capital inflows, possibly even some outlows.
China has also been under heavy pressure from the United States to let the yuan appreciate, with some US politicians saying the yuan's value is artificially high, robbing US citizens' of jobs and creating bilateral trade imbalance.
In the offshore non-deliverable market, one-year forwards traded at 6.3145 around midday. The rate implied 0.26 percent appreciation over the next year against Monday's PBOC mid-point.
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