The yuan closed lower against the dollar on Monday after the People's Bank of China fixed its daily mid-point slightly weaker to reflect a rise in the dollar index over the weekend. Despite the pullback, dealers expected the yuan to continue its recent rises, possibly appreciating 5 to 6 percent in 2011, partly because China appears to be using the currency as a tool to help tame inflation.
The PBOC has fixed a slew of record high mid-points since the start of this year, indicating the government may be allowing the yuan's exchange rate to appreciate to help fight inflation, partly propelled by high global commodity prices.
The yuan closed at 6.5645 versus the dollar, down from 6.5576 at Friday's close, when it hit an all-time trading high of 6.5549 in intraday trading. It has now risen 4.03 percent since it was depegged in June 2010, and 0.43 percent so far this year.
Amid the battle to curb inflation, the yuan is set to rise by about 5 percent this year, the president of Bank of China Ltd, the country's No 3 lender and largest foreign exchange bank, said on Friday. Offshore, benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4450 at midday, up slightly from 6.4340 at Friday's close. Their implied yuan appreciation in a year's time fell to 1.82 percent from 1.99 percent.
Since the start of this year, NDF-implied yuan appreciation has persistently lagged market expectations of a 5 to 6 percent rise in 2011 partly because hedge funds, the main players in forwards, cut back exposure to Asian markets in favour of dollar assets as the US economy recovers, traders said.