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Yuan Declines Most in Five Weeks as PBOC Weakens Reference Rate

Jan. 21 (Bloomberg) -- The yuan dropped the most in five weeks after the People’s Bank of China lowered the currency’s daily fixing and before policy makers meet in Europe and Japan.

The PBOC weakened the reference rate by 0.06 percent to 6.2790 per dollar, the lowest in more than a week. European finance ministers will meet in Brussels today for discussions on how and when the 500 billion-euro ($666 billion) European Stability Mechanism can provide direct help to banks. The Bank of Japan will conclude its two-day policy meeting tomorrow. The yuan has gained 0.18 percent against the dollar so far this year, after a 1 percent appreciation in 2012.

“A strong currency isn’t favorable to export growth so further gains will be limited in near term,” said Patrick Cheng, foreign-exchange analyst at Haitong International Securities Co. in Hong Kong. “There’s a bit of cautious sentiment before meetings in Europe and Japan.”

The yuan slipped 0.09 percent to 6.2213 per dollar in Shanghai, according to the China Foreign Exchange Trade System. That’s the biggest decline since Dec. 14. The spot contract is allowed to trade as much as 1 percent on either side of the central bank’s fixing.

Average daily yuan transactions in Hong Kong doubled to at least $6 billion in the past year, according to Standard Chartered Plc estimates, giving investors more confidence to invest in the currency using options, forwards and Dim Sum bonds.

In Hong Kong’s offshore market, the yuan weakened 0.07 percent to 6.1938 per dollar, data compiled by Bloomberg show. Twelve-month non-deliverable forwards dropped 0.03 percent to 6.2813, a 1 percent discount to the onshore spot rate.

One-month implied volatility, a measure of expected moves in exchange rates used to price options, fell five basis points, or 0.05 percentage point, to 1.35 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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