Central bank said cooling yuan down
(Reuters)
Updated: 2005-07-28 10:17

The Chinese yuan was pushed to a post-revaluation low against the U.S. dollar as China's central bank is said having intervened into the market in the last minute on Wednesday, the Reuters reported.

The yuan closed at 8.1128 to the dollar, its lowest vs.the dollar since China revalued its currency last Thursday.

A man looks at an electronic board that show latest foreign exchange rate at a Bank of China branch in Wuxi, East China's Jiangsu Province July 25, 2005. [newsphoto]

Dealers claimed that they saw the People's Bank of China diving into the market in the final minutes of trade, first pushing the yuan to 8.1127, then 8.1128 to the dollar, according the Reuter report.

"It was a clear intervention and sent a signal to the market that there will be no more appreciations for now. But it wasn't a surprise to us, as the central bank had said it would not appreciate the yuan after last week's move," a dealer was quoted as saying. 

The yuan has been pegged to the dollar near 8.28 since 1996 before China adjusted its value to 8.11 last Thursday and said it would finetune the yuan rate with reference to a basket of currencies of its main trading partners. European Union, the United States and Japan were China's three largest trade partners in 2004. 

The central bank issued a statement on its website on Tuesday to cool wild speculation that last week's appreciation was just the first of many.

It had been trying to send a message to the market, that it did not want the currency to strengthen further against the dollar in the foreseeable future.

Dealers said Wednesday's intervention indicated also that the central bank might be preparing to allow the yuan to move in a wider range up and down, the Reuters reported.

In Wednesday's trading the yuan firmed to 7.1954 against 100 Japanese yen from 7.2496, and strengthened against the euro to 9.7431 from 9.7709, according to China's central bank.

The yuan hit a post-revaluation high of 8.1089 on Monday.

The movements, though tiny by international standards, represent a much wider band than the 2 or 3 pip ranges typically seen before last Thursday's revaluation.

Outside of China, analysts noted that the dollar had strengthened against the yen and the won Wednesday -- which might also explain Chinese central bank's decision to nudge the yuan lower against the dollar.

Analysts said the move in dollar/yuan had been so small, however, that it suggested the dollar was a large component of China's reference basket for the yuan.

"They intervened so aggressively to push dollar/China to a weaker close, and that is consistent with a view that they are targeting a nominal effective exchange rate," said John Cairns, head of research at IDEAglobal in Singapore.

"We have to watch over time and see if that trend continues."

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