SHANGHAI: The yuan hit its highest level against the euro in a decade on Thursday, but it fell away against the dollar as investors sought a safe haven from the euro zone's intensifying debt and political crisis.
The Chinese currency also faced additional pressure after a private sector survey pointed to further weakness in the economy after a worse-than-expected slowdown in growth in the first quarter.
As the euro hovered just above a two-year low versus the dollar in Asian trade, the yuan picked up steam, trading as high as 7.9686 against the single currency in late morning.
It was the highest level since June 2002 and came as European nations urged debt-stricken Greece to stay on in the euro zone, but also prepared contingency plans in case it decided to leave.
The yuan trimmed gains slightly to trade at 7.9744 against the euro in early afternoon trading.
Overnight, the sharply weakening euro pushed the dollar index to a fresh high since September 2010.
"Everybody appears to want to keep a distance from the euro for now, and risk aversion leads to purchases of dollars," said a trader at a Chinese state-owned bank in Beijing.
"If the dollar index continues to strengthen in global markets, the yuan could see further falls versus the dollar."
Spot yuan was trading at 6.3385 per dollar at midday, compared with 6.3345 at Wednesday's close.
The yuan has fallen 0.45 percent against the dollar so far this month and dropped 0.70 percent so far this year.
Given the dollar's recent strength, traders said the yuan was likely to soon test its lowest level against the US currency this year, at 6.3471 and touched on March 14.
The currency's fall comes as growth slows in the world's second largest economy. An expansion in gross domestic product slowed to a near three-year low of 8.1 percent in the first quarter and many economists now believe it could fall below 8 percent in the second quarter.
SLOWDOWN
In the latest sign of China's economic slowdown, a private sector survey showed on Thursday that the country's factories faltered in May as export orders fell to two month lows.
The HSBC Flash Purchasing Managers Index, the earliest indicator of China's industrial sector, retreated to 48.7 in May from a final reading of 49.3 in April. It marked the seventh straight month that the index has been below 50, indicating contracting economic activity.
"Policymakers have been and will step up easing efforts to stabilise growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption," HSBC's chief economist Qu Hongbin, wrote in a statement accompanying the PMI release.
Traders expect a measured yuan depreciation to be one of the choices for policymakers in boosting the economy.
The People's Bank of China (PBOC) has already signalled that it will tolerate a measured relaxation of the yuan through the officially set midpoint exchange rate.
But at the same time, the central bank has kept the midpoint above the spot rate, which some traders see as a signal that it intends to keep the exchange rate relatively stable and not permit any sharp declines, traders said.
Before trading began on Thursday, the PBOC set the midpoint at 6.3247, slightly weaker than Wednesday's midpoint of 6.3208 but much stronger than Wednesday's yuan trading close.
The midpoint is the central bank's base rate for the yuan to rise or fall by a maximum 1 percent against the dollar in a day.
Offshore one-year non-deliverable yuan forward contracts continued to trade at a premium to the spot price, changing hands at 6.3960 in the afternoon session for a discount of 1.11 percent to Thursday's midpoint.
Offshore spot yuan was trading around 6.3360 in late trade, largely in line with the trend in the onshore spot market.
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