Yuan ends down, hits weaker limit for 10th day in a row

SHANGHAI: The yuan ended down against the dollar on Tuesday, hitting the lower end of its trading band for the 10th straight day as investors warily eyed a slower pace of rises in the Chinese currency amid a slowdown in the local and global economy.

A strong dollar index, boosted to a two-week high over worries about a euro zone ratings downgrade, and a shortage of dollars onshore, also weighed on the yuan, dealers said.

"The dollar is really strong, which has dragged the yuan lower today," said a dealer at a Chinese bank in Shanghai. "And we don't think the yuan has potential to rise sharply due to a slowdown in China's economy, especially weaker exports data."

The yuan is permitted to fluctuate within 0.5 percent of either side of the PBOC's daily mid-point but has repeatedly hit the weaker edge of the range despite relatively strong fixings as the market has lost confidence about a sharp ascent.

Until recently, a combination of international pressure from China's trade partners to revalue the yuan to balance global trade and China's own needs to manage inflation had pushed the currency steadily higher. It has risen 3.53 percent so far this year.

However, the yuan also had limited potential to fall sharply as China had indicated via its daily mid-point fixing that it seeks to keep the yuan stable. Dealers say the central bank wishes to deflect market speculation of yuan depreciation.

Beijing seems to be wary of sharp yuan fluctuations amid weak external demand and financial market turmoil caused mainly by the euro zone debt crisis.

Dealers expect that the policy for a stable yuan is likely to continue until global economic and market conditions improve, when China may resume yuan appreciation.

Spot yuan ended at 6.3652 against the dollar, up 138 pips from 10 trading days ago. The Chinese currency was down slightly from Monday's close of 6.3606.

The yuan has risen 7.24 percent since it was depegged from the dollar in June 2010.

Before trading began, the PBOC fixed the day's mid-point at 6.3359, down from Monday's 6.3297. 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 little changed at 6.4200 late on Tuesday against 6.4140 at the close on Monday, implying that the yuan would depreciate 1.33 percent in 12 months from Tuesday's PBOC mid-point, compared with a 1.22 percent fall implied on Monday.