SHANGHAI: The yuan closed slightly lower against the dollar on Thursday as China's central bank left its daily midpoint nearly unchanged, partially offsetting fresh strength in the US currency.
The dollar index, which tracks the dollar's value against a basket of major currencies dominated by the euro, edged up to a new two-year high of 83.619 in early European trade on Thursday after hitting a high on Wednesday.
But the People's Bank of China (PBOC) appears to be determined to keep the yuan largely stable amid global economic and market woes, traders said.
The PBOC's strategy is no surprise to market players because 70 percent or more of China's foreign trade is settled in US dollars, so a strengthening dollar will do little harm to China's economy and trade, traders said.
Even if the dollar strengthens and the index reaches 85, the PBOC "is still likely to peg the yuan to the dollar to a great extent," said a trader at a Chinese commercial bank in Shenzhen.
"A rough yuan/dollar peg will do China little harm, while a sharply depreciating yuan will spark outcries from the United States and other partners as well as worries over the health of the China's economy, which is already slowing sharply," the trader said.
Spot yuan closed at 6.3733 per dollar, down slightly from Wednesday's close of 6.3686. Recently, the currency has persistently traded below the PBOC's midpoint, which is the base rate from which the PBOC allows the yuan to rise or fall 1 percent in a single day.
PBOC ACTS AS ECONOMY SLOWS
Before trade began, the PBOC set the yuan's midpoint at 6.3215, marginally weaker than Wednesday's fix of 6.3209. It has recently set a slew of midpoints stronger than the yuan's trading level, seeking to keep the exchange rate largely steady.
The PBOC has mostly set the midpoint stronger than the 6.33 level since it widened the yuan's trading band to 1 percent from 0.5 percent in mid-April.
The midpoint's weakest level since then, 6.3355 on May 31, meant that the yuan could fall as low as 6.3989 from the fixing. Traders interpret this as a signal that 6.4 versus against the dollar may be the weakest level that PBOC will tolerate for now.
Sentiment on the yuan has soured this year by the dollar's rally and signs that the world's second largest economy is slowing down more rapidly than originally forecast.
China's annual economic growth slowed to 8.1 percent in the first quarter, and a Reuters poll showed market players now expect second quarter GDP growth -- to be announced on Friday -- to fall to a three-year low of 7.6 percent.
Chinese banks lent 919.8 billion yuan ($144.43 billion) worth of new loans in June, slightly higher than market expectations for 910 billion yuan, reinforcing bets that the government is relaxing lending restrictions to bolster flagging economic growth.
The central bank cut interest rates for the second time in a month last week, sparking fears that the economy may be slowing more sharply than earlier anticipated.
In the space of a week, at least half a dozen Chinese companies have issued profit warnings and many global firms have reported flagging China sales.
Asian Development Bank on Thursday cut its forecast for China's economic growth.
The economy is now expected to grow 8.2 percent this year, down from 8.5 percent that the bank forecast in April, Haruhiko Kuroda, the president of the Asian Development Bank, said.
Offshore one-year non-deliverable yuan forward contracts changed hands at 6.4200 on Thursday afternoon to imply yuan depreciation of 0.73 percent against the dollar in the next 12 months based on the spot yuan's closing rate.
Offshore spot yuan was trading around 6.3720 in late trade, roughly in line with the onshore spot level.
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