June 5 (Bloomberg) -- The yuan fell for a second day following the dollar's rebound, on speculation that the People's Bank of China is seeking to deter investors from betting on gains in its currency.

China's currency regulator reiterated today its pledge to boost foreign currency supervision as inflows of so called ``hot money'' may hamper government efforts to damp inflation. The yuan's appreciation has slowed since the start of April, after gaining 4.2 percent in the first three months, the fastest pace since a dollar peg was scrapped in 2005.

``The two-way fluctuations have increased uncertainty and disputes in the market and deterred hot money betting on yuan appreciation,'' said Tang Liang, a foreign exchange trader at the Beijing branch of Industrial & Commercial Bank of China Ltd., the nation's largest bank. ``The dollar's rebound against the euro today also boosts the U.S. currency's performance versus the yuan.''

The yuan dropped 0.11 percent to 6.9465 per dollar in Shanghai as of 5:30 p.m., from 6.9390 yesterday, according to the China Foreign Exchange Trade System.

China will strengthen monitoring of cross-boarder flows and the source of banks' foreign currency, said the State Administration of Foreign Exchange in a report today. China's foreign-exchange reserves rose to $1.76 trillion in April, from $1.68 trillion in March, Reuters reported on May 26.

Dollar Rebound

An index gauging the greenback against the currencies of six U.S. trading partners rose for a fourth day. The U.S. Dollar Index traded on ICE futures in New York added 0.30 percent to 73.646.

The Westpac Nominal Effective Exchange Rate, a trade- weighted index for the yuan that includes the euro and the yen, has climbed 4.2 percent so far this year, more than the 3.4 percent last year.

Since the end of the dollar peg in 2005, China has managed the exchange rate against a basket of currencies including the euro, yen, South Korean won, Hong Kong dollar and British pound.

``The Chinese authorities continue to favor a strong yuan nominal effective exchange rate for now to fight inflation,'' economists led by Shanghai-based Stephen Green said in a report today. ``The pace of appreciation is likely to slow further when inflation moderates and growth slows.'' The currency will strengthen to 6.55 a dollar by the end of the year, according to the U.K. bank, lowering an earlier forecast of 6.35.

Bonds Little Changed

Government bonds were little changed after interbank lending rates rose, curbing demand for debt.

The seven-day repo rate was 3.31 percent, 3.3 basis points higher than the fixing rate yesterday, according to the National Interbank Funding Center. A basis point is 0.01 percentage point.

``Banks that have demand for debt are short of cash as I heard many recently paid their income tax for last year,'' said Liu Jin, a fixed-income trader with Postal Savings Bank of China in Beijing. ``The inflation rate is expected to fall in May, preventing debt from sliding much.''

China's inflation quickened to 8.5 percent in April, close to a more than 11-year high of 8.7 percent in February.

The yield on the 4.01 percent treasury bond due in May 2015 was little changed at 4.03 percent, according to the China Interbank Bond Market, The price of the security held at 99.90 per 100 yuan face amount.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

Last Updated: June 5, 2008 06:51 EDT