SHANGHAI: The yuan fell on Tuesday in response to a stronger dollar in global markets overnight, but traders said the central bank is likely to prevent the yuan from slipping too far in the third quarter.
"The central bank doesn't want the renminbi to depreciate excessively. If the euro falls too fast, then they will use the midpoint to make sure that the renminbi doesn't fall as fast," said a trader at an Asian bank in Shanghai, using the alternate name for the Chinese currency.
The yuan had its weakest quarter on record in April-June, falling 0.9 percent.
The dollar/yuan rate largely correlated with trends in the euro/dollar, as growing pessimism about the euro zone debt crisis curbed the appetite for riskier assets including most Asian currencies.
The yuan changed hands at 6.3541 per dollar at midday on Tuesday, 40 pips weaker than Monday's close, after the central bank set its midpoint 32 pips weaker at 6.3178.
The fall erased the currency's gains from Monday, when it hit a one-month high following the strong rally in the euro on Friday.
The yuan has consistently traded weaker than the central bank's fixing since mid-March, amid worries about Europe and fears that China's economy was losing momentum faster than earlier expected.
But traders say the central bank is now using its midpoint and selected interventions in the interbank forex market to signal that it will not tolerate substantial moves.
Each time the dollar/yuan rate approached 6.37 per dollar last week, large banks stepped in with dollar liquidity to push the yuan higher, traders say.
As for the midpoint, the central bank set a weaker yuan fix in response to a stronger dollar overnight, but the magnitude of the weakening is less than the corresponding strengthening of the dollar.
On Tuesday, the dollar index fell by 0.3 percent, but the central bank set its dollar/yuan midpoint higher by only 0.05 percent.
The midpoint fixing is the base rate that the central bank uses to flag the government's intentions for the yuan's value, and from which the yuan is allowed rise or fall by 1 percent.
"I see the yuan rising," said a trader at a joint-stock bank in Shenzhen, discussing his forecast for the third quarter.
"If the euro recovers, the yuan will rise strongly. But if the euro falls back, the central bank won't let the yuan fall very much," he said.
In the offshore market, offshore yuan traded at 6.3535 near midday, basically in line with the onshore spot rate.
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