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China strengthens yuan fixing by most since 2005 as dollar sinks

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China's central bank responded to an overnight tumble in the dollar by strengthening its currency fixing the most since a peg was dismantled in July 2005.

[BEIJING] China's central bank responded to an overnight tumble in the dollar by strengthening its currency fixing the most since a peg was dismantled in July 2005.

The reference rate was raised by 0.6 per cent to 6.4589 per dollar. A gauge of the dollar's strength extended its 1 per cent slide on Thursday, when the Bank of Japan's decision to unexpectedly keep monetary policy unchanged sent the yen surging.

The offshore yuan weakened 0.12 per cent to 6.4914 as of 5:35 pm in Hong Kong after gaining 0.3 per cent in the last session.

While the change in the fixing is extreme relative to the small moves of recent years, analysts said it reflects increased volatility in the dollar against other major exchange rates rather than a policy shift by the People's Bank of China. The yuan weakened against a basket of peers on Friday.

"The offshore yuan's reaction is muted, so it seems the market was already expecting a much stronger fixing," said Ken Cheung, a currency strategist at Mizuho Bank Ltd in Hong Kong.

"This is a reaction to the dollar weakness overnight, and there's not much in the way of policy intention to read into." The dollar headed for its the lowest close in almost a year on Friday as signs of slowing growth in the US dimmed prospects for a Federal Reserve interest-rate increase.

A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, fell 0.2 per cent to a 17-month low. The onshore yuan weakened 0.2 per cent.

"The fixing is no surprise, the expectation for a stronger yuan fix was laid by the gains for the yen after the Bank of Japan announcement yesterday," said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong.

"The trade-weighted basket continues to depreciate, albeit at a modest pace. But the key to the lower trade-weighted rate does not really lie with the PBOC, rather it is the dollar weakness against other major currencies which is the main driver."

BLOOMBERG