Spot yuan changed hands at 6.2400 versus the dollar near midday, a gain of 0.1 percent over Wednesday's close of 6.2518. The yuan had touched an eight-week intraday low of 6.2588 on Wednesday afternoon.
The People's Bank of China (PBOC) signalled its desire for stability by setting its daily midpoint nearly flat at 6.2887 compared to Wednesday's fix of 6.2883. The PBOC allows the yuan to rise or fall by no more than 1 percent from the midpoint it sets each morning.
Traders say the Federal Reserve's surprise announcement of a new round of quantitative easing had little immediate impact on the market on Thursday, but they say the yuan could strengthen in line with other non-dollar currencies as the Fed's bond buying runs its course.
Earlier this week, aggressive dollar buying by major state banks this week, almost certainly at the behest of the central bank, restored liquidity to a market. For more than a month the market had been deadlocked by the lack of dollar bids, which resulted in the yuan moving to the strongest level permitted by the central bank nearly every day.
Traders say that corporate dollar demand has reappeared, but demand for yuan still outweighs dollar demand, suggesting the market remains dependent on the central bank to maintain liquidity.
The yuan has weakened steadily from an all-time high of 6.2223 per dollar touched on November 23 due to a series of weaker midpoints as well as the apparent PBOC intervention to buy dollars.
Trading volume was $3.9 billion through midday Thursday, well above the anemic levels seen during the deadlock. But the volume looked likely to be well down from levels seen on Wednesday, when the central bank was apparently still active in the market and full-day volume totaled $15.1 billion.
The People's Bank of China (PBOC) has repeatedly stated this year that it intends to reduce market intervention, so it's unclear whether authorities will be willing to sustain dollar buying indefinitely.
SWAPS SETTLE DOWN
The swap market returned to apparent balance on Thursday after the central bank's dollar buying had wrought havoc by fuelling expectations of a dollar shortage.
The dollar premium on one-year swaps collapsed to a low of 425 points on Wednesday, after trading consistently above 1,300 for three months until Tuesday.
Traders say panic selling of long forward dollar positions and the breaching of stop-loss triggers caused the collapse. The movement implied a run-up of one-year USD interest rates to 1.55 percent on Wednesday from 0.47 percent a week earlier, according to Thomson Reuters calculations.
Short-term swap points also fell, with overnight swaps entering negative territory on Wednesday, signifying a shift from dollar premium to discount.
But the dollar premium recovered much of its lost ground on Thursday, with one-year swaps changing hands at 1,050 points near midday and overnights trading at parity.
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