SHANGHAI: The yuan edged higher against the dollar on Tuesday as a firm euro kept banks and their clients cutting some of their yuan short positions, traders said.
But as a reflection of continued jitters over a general rally in the dollar index so far this month, traders said dollar demand on the Chinese market remained firm, preventing the yuan from rising sharply.
The Chinese currency is expected to trade in a narrow range in the near term, with market participants watching the dollar's performance in global markets.
"We see a rough balance of dollar supply and demand in the market for now," said a trader at a state-owned bank in Beijing.
"Unless there is another round of a dollar rally in the global market, the yuan is likely to take a breath and move narrowly for a short period of time."
Spot yuan was trading at 6.3252 per dollar at midday, up slightly from 6.3279 at Monday's close.
Before trading began, the People's Bank of China fixed its daily midpoint slightly stronger at 6.3077 against the dollar compared with Monday's midpoint of 6.3116, reflecting a fall in the dollar index in global markets.
The yuan has been under depreciation pressure since China's economy showed unexpected weakness in April amid worsening political and economic conditions in the euro zone, with banks and their clients building yuan short positions during a dollar rally this month.
Growth in China's gross domestic product slowed to a near three-year low of 8.1 percent in the first quarter. Many economists now believe the growth of the world's second-largest economy could fall below 8 percent in the second quarter.
The PBOC has recently set a series of midpoints stronger than the yuan's trading level, as it seeks to keep the exchange rate relatively stable, although it has also signalled that it would tolerate a measured depreciation.
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 6.3765 in the afternoon session for a discount of 1.08 percent to Tuesday's midpoint.
Offshore spot yuan was trading around 6.3240 around mid-session, largely in line with the trend in the onshore spot market.
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