Money

Yuan declines on weaker central bank fixing

By Lu Jianxin and Jacqueline Wong (China Daily)
Updated: 2011-05-04 11:24

SHANGHAI - The yuan pulled back slightly against the dollar on Tuesday from a slew of recent record highs, as the People's Bank of China fixed a marginally weaker mid-point, signaling the central bank may stick to gradualism in reforming the country's currency regime.

The consolidation came after the yuan breezed past 6.50 a dollar on April 29, surpassing the psychologically important level for the first time and raising expectations that the currency will continue to strengthen quickly to battle stubbornly high inflation. Monday was a public holiday in China.

Traders said Tuesday's weaker PBOC fixing indicated again that the government may choose not to conduct drastic reforms, such as a one-off revaluation or to widen the trading band. It may opt to let the yuan rise gradually in line with global market conditions, such as the fluctuation in commodity prices.

Related readings:  Yuan continues to weaken against dollar  Yuan exchange rate to be more flexible  Exchange rate policy not major tool taming inflation  PBOC may again raise reserve ratio in mid-May

The indication was in contrast to speculation in overseas markets since late April that China may unshackle its foreign-exchange regime.

Rumors have been fanned by a slew of record high PBOC fixings this year, and media reports quoting a PBOC adviser saying that a one-off revaluation could not be ruled out.

"Here we see some sort of behind-the-curve speculation on yuan appreciation that goes to the extreme in some cases," said a trader at a European bank in Shanghai. "We see little chance of China giving up its approach to gradualism for now."

Before trading began, the PBOC set the day's mid-point at 6.5002, marginally lower than Friday's record fixing of 6.4990. Onshore traders said a quicker pace of yuan appreciation this year has been expected for months as China uses the exchange rate to help fight imported inflation, adjust the economic structure and relieve a heavy reliance on exports for growth.

Reuters