SHANGHAI: The yuan edged higher on Tuesday on a weaker dollar, in a strong signal by the central bank that global movements in the dollar will be the dominant factor in guiding the yuan's value in the near term.
The dollar traded slightly weaker overnight, prompting the People's Bank of China (PBOC) to set a stronger mid-point, following three days in which a rising dollar was met with weaker mid-points.
Spot yuan traded at 6.3128 by midday on Tuesday, 18 pips stronger than Monday's close of 6.3146.
The PBOC will continue to let the direction of the dollar index determine the trend in its daily fixings in the near term, traders said. The two rates generally move in opposite directions.
"Looking at the last several trading days since the New Year, the link between the mid-point and the dollar index has been quite high," said a foreign exchange trader at a city commercial bank in Shanghai.
The trend indicates that the government's stated policy of keeping the yuan exchange rate "basically stable" does not refer exclusively to the yuan-dollar rate, but rather to the yuan's value against a broader basket of global currencies.
"In the near term, the link with the dollar index will strengthen," said the trader.
Traders expect that spot yuan will trade in a narrow range for the next several weeks. For full-year 2012, the market is expecting moderate appreciation of around 3 percent, with increased volatility in both directions.
The spot rate has hovered slightly above the central bank's mid-point in the first few days of the year, a shift from the end of 2011, when the yuan consistently traded below the fixing.
This shift is likely due to a narrowing of the spread between the offshore rate, traders say. After trading at a discount to the onshore rate from mid-September, the two rates reached virtual parity on Friday.
As a result, trading firms that had been purchasing yuan in the offshore market -- in order to take advantage of the cheaper price there -- began shifting their purchases back onshore, leading to the moderate appreciation pressure evident in the last few days.
In the offshore non-deliverable forwards market, one-year NDFs tracked the onshore movement, reaching 6.3220 at midday, 80 pips stronger than Monday's close.
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