The yuan fell to the lowest level in more than seven weeks on speculation policy makers will limit appreciation to support exporters and the economy.
The People’s Bank of China set the currency’s fixing 0.1 percent weaker at 6.3328 per dollar today. The world’s second- largest economy had the biggest trade deficit in at least 22 years last month and the smallest increase in January-February factory output since 2009, government data showed last week. Premier Wen Jiabao said in Beijing today the yuan may be near an equilibrium and policy makers will allow greater movement in the exchange rate.
“There’s an assessment the weak trade numbers reported over the weekend will prompt policy makers to limit yuan appreciation,” said Brian Jackson, a currency strategist at Royal Bank of Canada in Hong Kong. “I don’t expect the yuan to weaken significantly on a sustained basis. We expect exports to pick up again.”
The yuan dropped 0.1 percent to 6.3323 per dollar in Shanghai, the weakest level since Jan. 30, according to the China Foreign Exchange Trade System. The currency has depreciated 0.3 percent this week.
The goal of China’s exchange-rate regime reform is to benchmark the yuan’s value to a trade-weighted basket instead of just the dollar, Bank of America Corp. economists led by Ting Lu wrote in a note to clients. A basket-currency regime will make the yuan more volatile against the dollar, the report said.
The Dollar Index traded on ICE Futures in New York gained 0.1 percent today after a 0.4 percent increase yesterday. The U.S. Federal Reserve expects “moderate economic growth” as the labor market has improved and the unemployment rate fallen, according to a statement released yesterday.
The yuan “may possibly have reached an equilibrium level” based on trading in Hong Kong since September, Wen said at the press conference. The government will “continue to enhance reform of the exchange-rate mechanism, especially to allow relatively wider, two-way fluctuation,” he said.
“The currency will be more volatile” this year even as “modest” gains are still likely, said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This explains this week’s yuan moves.”
One-month implied volatility, a measure of exchange-rate swings used to price options, rose 0.20 percentage point to 2.45 percent.
In Hong Kong’s offshore market, the yuan increased 0.1 percent to 6.3305. Twelve-month non-deliverable forwards fell 0.10 percent to 6.3456, a 0.2 percent discount to the onshore spot rate, according to data compiled by Bloomberg.
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