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China's yuan slightly softer, faces more downward pressure
[SHANGHAI] China's yuan softened on Friday, but its decline was partly cushioned by a defensive US dollar, as investors brace for further depreciation in the Chinese currency in the longer term.
The market expects the yuan to face downward pressure from China's slowdown and with US interest rates poised to rise, although the Chinese central bank has reaffirmed its pledge to maintain the yuan's stability.
The spot market opened at 6.6778 per US dollar and was changing hands at 6.6793 at midday, 13 pips weaker than the previous close.
If the yuan closes at the midday level on Friday, it would have depreciated 0.2 per cent for the week. It hit a six-week trough earlier this week after Federal Reserve Chair Janet Yellen's upbeat comments on the US economy encouraged traders to raise their bets on a US interest rate hike as early as this month.
But on Friday, the US dollar was on the back foot after taking a tumble following a surprise contraction in US manufacturing, which cast some doubts on the strength of the recovery in the world's largest economy.
Yi Gang, a PBOC deputy governor, said on Thursday that despite the yuan's latest retreat, the currency remained relatively stable.
In case of sharp volatility, the central bank would use various policy tools to maintain its stability, Mr Yi told China's central television in an interview on Friday.
A Reuters poll published on Thursday found that the yuan was expected to weaken more than previously thought in a year.
The survey of over 60 foreign exchange strategists, conducted Aug 26-Sept 1, showed the yuan is expected to slip to 6.80 per US dollar by end-February, and eventually dip to 6.89 by this time next year - a fall of more than 3 per cent from its current level.
"It is nearly a consensus that the yuan will generally show a downward trend in coming months, though people differ on how much it will depreciate," said a trader at a European bank in Shanghai.
Traders said the PBOC largely stayed on the sidelines on Friday, refraining from intervening to support the yuan.
The central bank intervened to prevent the yuan from weakening beyond the psychologically important 6.7 per US dollar for about two weeks after the currency briefly fell below that level in mid-July.
The yuan has generally softened this year, depreciating nearly 3 per cent so far.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.04, weaker than the previous day's 95.26.
The offshore yuan was trading -0.14 per cent away from the onshore spot at 6.6885 per US dollar.