The yuan ended down against the dollar on Friday after the People's Bank of China set a sharply weaker mid-point in an apparent expression of displeasure to renewed US pressure for the Chinese currency to appreciate. But traders said Beijing's gesture was unlikely to develop into a full-blown currency battle with the United States and that the trend for the yuan to appreciate was expected to continue at least in the near term.
While the Chinese government generally tries to paint a picture of resisting to US calls for yuan appreciation, it has generally let the currency strengthen over the past several years partly in recognition of the importance of the ties between the world's two biggest economies, dealers said.
"Everybody here believes China has a sort of internal, tentative plan as to where the yuan will be at the end of a month, a quarter and a year," said a senior trader at a European bank in Shanghai. Spot yuan closed at 6.5919 against the dollar, down from 6.5865 at Thursday's close. It has now risen 3.56 percent since its depegging from the dollar in June 2010.
Before trading began, the PBOC fixed its daily mid-point at 6.5952 to the dollar, down from Thursday's record high of 6.5849. The fixing, from which the yuan can trade up or down a maximum 0.5 percent in a given day, is the tool that the central bank uses to express the government's intention on the currency. A bipartisan group of 101 US lawmakers in the House of Representatives launched a new bid on Thursday to pass legislation aimed at pressuring China to let the yuan appreciate.
The same proposals cleared the House last year but died in the Senate. If approved this time, they would clear the way for the Commerce Department to treat currencies deemed to be undervalued as an illegal subsidy under US trade law. China's high inflation, at about 5 percent currently, is also helping the yuan's real exchange rate strengthen.
The currency is expected to rise further in the near term and is seen appreciating 5 to 6 percent in 2011 based on China's economic strength and its increasing willingness to move to a more flexible exchange rate regime, traders said.
A research report by Bank of America Merrill Lynch on Friday predicted that the yuan would be overvalued by July this year. Benchmark one-year dollar/yuan non-deliverable forwards were bid at s6.4490 late on Friday, up from 6.4320 at Thursday's close. Their implied yuan appreciation in a year's time fell to 2.27 percent from 2.54 percent.