SHANGHAI: China's yuan weakened slightly against the dollar on Tuesday, as traders braced for an imminent tapering by the US Federal Reserve.
Tighter US monetary policy threatens to weaken the currency of China, which is unlikely to follow the Fed in any change in settings, but many see the spillover effect of a stronger greenback manageable.
The yuan opened at 6.3960 per dollar and was changing hands at 6.3988 at midday, slightly weaker than the previous late session close, despite a firmer midpoint set by the People's Bank of China at the open.
The Fed begins a two-day meeting later on Tuesday, where it is expected to announce tapering of its asset purchase.
The market also expects the Fed to raise interest rates next year.
"Foreign portfolio inflows to China will likely slow but not dry up," wrote Zhaopeng Xing, senior China strategist at ANZ.
"Despite the Fed entering a tightening cycle, Chinese corporates' repayment of their USD-denominated debt appears to be manageable this time, as the yuan remains on an appreciation path and domestic banks have accumulated sufficient USD deposits from corporates."
Traders forecast the yuan will continue to move sideways during the rest of the year, as robust dollar sales from exporters will limit the impact of a potentially stronger dollar.
But China International Capital Corp forecast a slight weakening of the yuan in November, citing divergent US-China monetary policies, as well as the impact on Chinese exports from factory re-openings in other Asian countries.
Beijing is under pressure to ease policies to support smaller firms struggling in a slowing economy.
China's cabinet on Tuesday issued guidelines to develop consumer services, including increased financial support for small firms providing catering, accommodation, childcare, healthcare and services for the elderly.