Yuan Snaps Two-Day Gain on Weaker Fixing as Europe Woes Deepen

May 23 (Bloomberg) -- The yuan fell, snapping a two-day advance, as the central bank weakened the currency’s reference rate by the most in more than two weeks amid mounting concern that Europe’s debt crisis will worsen.

The People’s Bank of China set the yuan’s reference rate 0.21 percent lower at 6.3208 per dollar. The Bloomberg-JPMorgan Asia Dollar Index fell to its lowest level since December and Asian stocks retreated after the Wall Street Journal cited former Prime Minister Lucas Papademos as saying that while Greece is unlikely to leave the euro, it is still a risk.

“Europe will continue to grind away, so certainly there will be little support for strong yuan appreciation,” said Sacha Tihanyi, a senior strategist in Hong Kong at Scotiabank, a unit of Bank of Nova Scotia. “The weaker we see the euro and other regional Asian currencies, the more depreciation pressure there will be on the yuan.”

The yuan declined 0.18 percent, the most since April 16, to 6.3345 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency is allowed to trade as much as 1 percent on either side of the daily fixing. One-month implied volatility, a measure of exchange-rate swings used to price options, rose three basis points, or 0.03 percentage point, to 2.13 percent.

China’s full-year economic growth may be below 7 percent unless the government introduces more stimulus measures, the Wall Street Journal reported on its Chinese-language website today, citing Chen Dongqi, deputy head of the National Development and Reform Commission’s macroeconomic research institute.

In Hong Kong’s offshore market, the yuan fell 0.13 percent to 6.3320. Twelve-month non-deliverable forwards decreased 0.22 percent to 6.3938, according to data compiled by Bloomberg. The contracts were at a 0.9 percent discount to the onshore spot rate.

To contact the reporters on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net;

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net