SHANGHAI: China's yuan weakened slightly in active trading on Monday morning due to higher dollar demand as the year-end approaches, traders said.
The Chinese currency was also weakened by a softer midpoint fixing by the People's Bank of China (PBOC), which traders said reflected a rebound in the dollar index late last week.
The yuan was trading at 6.2329 per dollar at midday, slightly lower than Friday's close of 6.2286.
The PBOC marginally weakened its midpoint to 6.2913 from Friday's 6.2881. The exchange rate is only allowed to diverge by 1 percent in either direction from the central bank's daily midpoint.
The morning's trading volume jumped to $10.77 billion from Friday morning's $3.8 billion as traders said clients were preparing their forex positions for the end of the year-end accounting period.
"In the Chinese system, all foreign exchange activities must be settled by the end of the calendar year, while much local currency business is settled around the Lunar New Year," said a Chinese bank trader in Shanghai.
"Still, there is a possibility the central bank might guide the yuan up slightly in the final several days of a year to window-dress the yuan's value," he said.
China has long been under pressure from the United States to let its yuan appreciate to balance bilateral trade, and over the past few years, the PBOC typically let its currency rise slightly in final few days of December to increase the percentage by which it strengthened in a year.
But this year the situation could be different, some traders said. During 2012, the government has repeatedly said that the yuan has reached its fair value, and that it is no longer necessary for the central bank to intervene in trading in a large scale to guide the currency's value.
The offshore yuan (CNH) continued to trade at a premium to the onshore version on Monday, changing hands at 6.2275. Analysts said bullish sentiment toward the yuan in offshore markets - which are not restrained by the central bank's midpoint - explained the phenomenon.
But the spread has narrowed significantly since Thursday as markets grew increasingly concerned that the US could fail to reach a deal over its "fiscal cliff." Such a failure would risk putting the US economy into recession, and by extension, strengthen the dollar - the foremost safe-haven currency.
Offshore one-year non-deliverable forwards have also weakened since Thursday to 6.3352, implying depreciation of around 1.6 percent in the next 12 months.
Center>Copyright Reuters, 2012
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