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Yuan Approaches a Two-Month Low on Concern Fed Will Cut Stimulus

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Feb. 21 (Bloomberg) -- China’s yuan dropped toward a two-month low on concern the U.S. will scale back an asset-buying program that has been fueling fund flows into emerging markets.

Several Federal Reserve policy makers said the central bank should be ready to vary the pace of its $85 billion of monthly bond purchases, minutes of a Jan. 29-30 meeting released yesterday showed. The Dollar Index rose 0.75 percent yesterday, the most since July. The People’s Bank of China cut the daily yuan fixing by 0.07 percent to 6.2846 per dollar today.

The yuan is responding to a weaker fixing as investor sentiment in Asia turned negative, said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore. “We’ll still be looking to a rally as price pressure in China has started to pick up. It’s an environment for the Chinese currency to strengthen to fight inflation.”

The yuan weakened 0.05 percent to close at 6.2405 per dollar in Shanghai and 6.2433 earlier, prices from the China Foreign Exchange Trade System show. It reached 6.2454 on Feb. 19, the lowest level since Dec. 14. Spot prices are allowed to diverge a maximum 1 percent from the reference rate. Westpac expects the currency to appreciate to 6.15 by the end of June.

In Hong Kong’s offshore market, the currency fell 0.09 percent to 6.2393 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards slipped 0.1 percent to 6.3247, a 1.3 percent discount to the onshore spot rate. One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, was at 1.28 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: Amit Prakash at aprakash1@bloomberg.net

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