Yuan hits 4-1/2-year low as China aims to loosen peg to dollar

[SHANGHAI] China's yuan hit a fresh 4-1/2-year low to the dollar on Monday, after the central bank said it had begun publishing a yuan exchange rate weighted against a basket of currencies, a move that will eventually loosen the currency's link to the greenback.

The China Foreign Exchange Trade System (CFETS) announced after the market close on Friday that it had launched a new trade-weighted yuan exchange rate index - a move that suggests Beijing will let the yuan weaken further against the dollar.

The announcement by CFETS, a unit of the central bank, shows Beijing's intention to gradually make the yuan an independent currency, traders said. "The weightings clearly show that China intends to get rid of the yuan's reliance on the dollar over time," said Huang Yi, head of forex trading at China Guangfa Bank in Shanghai. "As such, the yuan's movements will be more market-oriented and rely on economic and financial fundamentals in the long run." The yuan is set to depreciate against the dollar in the near term due to a slowdown in the world's second-largest economy and a strengthening dollar as the US Federal Reserve prepares to raise interest rates this week, traders said.

The People's Bank of China set the midpoint rate at 6.4495 per dollar prior to market open, its weakest level since 2011, and 0.2 per cent weaker than Friday's fix of 6.4358.

The spot market opened at 6.4623 and was changing hands at 6.4588 at midday, 0.05 per cent weaker than the previous close. The spot rate is currently allowed to trade with a range 2 per cent above or below the official fixing on any given day.

Spot yuan fell to 6.4665 in early trade, its weakest point since July 2011.

Offshore yuan was trading 1.38 per cent weaker than the onshore spot rate at 6.5492 per dollar, its biggest discount against onshore yuan since early September, indicating poor sentiment towards the yuan in overseas markets.

WEIGHTINGS In an explanation to the move, the PBOC said in a statement on its website on Monday that the yuan has the conditions to basically remain stable in the medium to long term. "Referring to a basket of currencies does not mean to peg to the basket," the PBOC said. "While market entities should not peg (yuan) to the dollar from now on but to refer to a basket of currencies, it takes time for them to get accustomed to the new situation.

The CFETS yuan index covers 13 currencies, with the dollar given a weighting of 26.4 per cent, the euro 21.39 per cent and the Japanese yen 14.68 per cent.

The weightings largely reflect China's trade status, but taking into considerations that the greenback is also used by China for large amounts of settlement of non-Chinese-US trade, the dollar's weighting is relatively low, traders said.

Still, the dollar weighting implies that Beijing hopes to gradually settle more trade directly between the Chinese yuan and the currencies directly involved in trade, they said. "While the dollar accounts for more than 50 per cent of China's foreign trade settlement for now, the weighting can be regarded as Beijing's target for the future," said a senior trader at a major European bank in Shanghai. "That suits China's ambition to make the yuan an independent global reserve currency." CFETS said the index was at 102.93 on Nov. 30, a rise of 2.93 per cent from its starting point of 100 at the end of 2014.

In that same period, the yuan has fallen 3 per cent against the dollar, but gained 10 per cent against the euro and was nearly flat against the yen.

REUTERS