Yuan edges down after mid-point, upward trend seen intact

SHANGHAI: The yuan edged down against the dollar on Friday after the People's Bank of China set a slightly weaker mid-point, but its decline lagged a 0.6 percent rise in the dollar index.

That could be a sign the central bank still aims to control the pace of yuan appreciation, dealers said, but further rises were expected as the government continues to use the yuan to help fight persistently high inflation.

"A fall of several pips in the mid-point may indicate the central bank is likely to restart a new round of appreciation," said a dealer at a Chinese bank in Shenzhen. "But the pace will still be gradual."

He expected the yuan could rise two percent in the first half year of the year to around 6.45 percent, and five percent for the whole year by the end of the second half year.

Spot yuan was trading at 6.4720 versus the dollar on Friday, down slightly from Thursday's close of 6.4676.

The Chinese currency has appreciated 5.47 percent since it was de-pegged from the dollar in June 2010, and 1.79 percent since the start of this year, appreciating at a pace faster than the market had previously expected.

Before trade began, the PBOC set the yuan's daily mid-point at 6.4742 versus the dollar, lower than Thursday's 6.4736.

The dollar index, which tracks its performance against a basket of major currencies, was down 0.2 percent on Friday after a 0.6 percent gain overnight.

The NDFs appear to have lost their function to help forecast the prospect of yuan gains in recent months as they do not respond to the yuan's repeated record highs, with traders citing diversion of funds to Hong Kong's expanding offshore yuan business as a key factor.

One-year dollar/yuan NDFs were bid at 6.3910, little changed from the previous day's close of 6.3920. Their implied yuan appreciation in a year's time edged up to 1.30 percent from 1.29 percent.

Copyright Reuters, 2011