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China Yuan Declines as Lower Central Bank Fixing Forces Retreat

China’s yuan fell after the central bank lowered its reference rate, forcing the currency to weaken to stay within the permitted trading range.

The People’s Bank of China cut the fixing 0.06 percent to 6.2070 per dollar as the Dollar Index climbed to the highest since July. The fixing was 1.03 percent weaker than yesterday’s closing level in the spot market. Premier Li Keqiang said the economy faces “relatively large” downward pressures and there is limited room for stimulus, according to the transcript of a speech posted on the central government’s website.

The yuan declined 0.05 percent to close at 6.1459 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency, which has strengthened 1.4 percent this year, is allowed to trade as much as 1 percent either side of the daily fixing.

“The dollar’s strength has driven a retreat in Asian currencies including the yuan,” said Patrick Cheng, a foreign-exchange analyst at Haitong International Securities Co. in Hong Kong. “Yuan appreciation is likely to slow as the government will no longer stimulate the economy aggressively. The days of rapid growth are gone as the new leadership seeks a more balanced economy.”

Bank of America Merrill Lynch reduced its estimate for China’s 2013 economic growth to 7.6 percent from 8 percent, according to a note from economists including Ting Lu in Hong Kong. The reasons for the cut include base effects and sluggish external demand, Lu said.

Band Widening

In Hong Kong, the offshore yuan was steady at 6.1429 per dollar, from yesterday’s 6.1421, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards declined 0.09 percent to 6.2276, a 1.4 percent discount to the onshore exchange rate.

China may widen the yuan’s trading band in the next three months after the foreign-exchange regulator announced rules to deter speculative funds from betting on appreciation, Patrick Wu, head of yuan trading at JPMorgan Chase & Co., said in an interview in Shanghai yesterday.

One-month implied volatility in the yuan, a measure of expected moves in the exchange rate used to price options, climbed three basis points, or 0.03 percentage point, to 1.89 percent.

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