SHANGHAI: The yuan weakened slightly against the dollar on Wednesday in light trading, as traders awaited a policy meeting of the European Central Bank later in the day for any signs it may take fresh steps to address the euro zone's worsening debt crisis.
Global currency markets are also awaiting a speech by US Federal Reserve Chairman Ben Bernanke before a congressional panel on Thursday. Investors are hoping Bernanke will clarify whether the Fed plans to bolster the economic recovery through another round of quantitative easing.
China's central bank fixed the yuan midpoint down at 6.3261 per dollar on Wednesday after three consecutively firmer fixings, but spot prices continued to trade in a narrow band between 6.3685 and 6.3602 by midday, as they have since the beginning of the month.
The yuan recorded its largest one-month drop in history against the dollar in May, losing nearly 1 percent, as the European crisis prompted global investors to move into safe-haven assets like the dollar and US Treasuries.
A trader at a joint stock bank in Shanghai said the currency has been following the dollar index even more closely in recent days, but that transaction volumes remain low and customer appetite is weak given current uncertainties.
"Prices for dollars are relatively high right now, so big customers are less inclined to bid," he said.
The central bank has also tightened the inverse relationship between the euro-yuan fix to the dollar fixing since early May. The euro continued a sputtering rally that began at the end of May, when it hit its lowest value against the dollar in a decade.
The euro is still extremely weak in currency markets, however, which is complicating Beijing's efforts to stimulate its economy after a series of lacklustre domestic economic indicators rattled markets.
Europe accounts for more than a fifth of Chinese exports -around 16 percent if the United Kingdom is excluded - which some analysts say has given the PBOC an incentive to push the yuan down slightly against the dollar, so as to prevent it from rising further against the euro.
Yuan 1-year non-deliverable forwards strengthened slightly in offshore trading.
The offshore yuan (CNH) continued to track the onshore yuan but maintained its trend of trading slightly weaker than the onshore spot, which may be related to tightening liquidity in the CNH market. The supply of offshore yuan continued to contract in April, and has now shrunk for five consecutive months.
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