SHANGHAI: The central bank set the yuan midpoint slightly higher Monday as the dollar index weakened slightly in overnight trading, but spot prices were little changed. The dollar index, which tracks the US dollar's value against a basket of major currencies dominated by the euro, weakened slightly but traded at 83.392 as domestic markets closed, near to the two-year high of 83.829 hit on Thursday. Traders say the People's Bank of China (PBOC) appears to be propping up the yuan to prevent any drastic movements in the spot rate by keeping the midpoint fix stable. An overly quick depreciation of the yuan could cause destabilising capital outflows. The midpoint -- the base rate from which the central bank allows the yuan to rise or fall 1 per cent in a single day -- was set 6.3208 against the dollar on Monday, well within the tight range it has moved in since late June. Spot yuan opened at 6.3770, up slightly from Friday's close, and remained relatively flat all day, ending down slightly at 6.3787, only 2 points away from Friday's close. "There are lots of sellers and no shortage of buyers, resulting in a relatively balanced market," a trader at a Shanghai bank said. China on Friday said it grew 7.6 per cent in the second quarter from a year earlier, its slowest pace in three years. But as that was in line with market expectations, traders said it had already been largely factored into the yuan's value. Traders are now assessing how much more macroeconomic easing will be rolled out by Beijing in coming months. Policymakers are struggling between the need to make structural reforms that will improve the economy in the long run while simultaneously addressing the immediate consequences of declining demand from trading partners. Lessening appetite for Yuan Sentiment on the yuan has soured this year amid the dollar's rally and signs that the world's second largest economy is slowing more rapidly than originally forecast. The yuan has depreciated 1.3 per cent versus the dollar in 2012. Traders believe further drastic declines are unlikely. They say the midpoint settings signal that 6.40 against the dollar is the weakest level the PBOC will tolerate for now. PBOC data issued on Thursday showed that the central bank and Chinese financial institutions bought a net 49.1 billion yuan ($7.7 billion) worth of foreign exchange in June, up from 23.4 billion yuan in May but down sharply from 277.3 billion in June last year. Average monthly net forex purchases in the first six months of 2012 were just 50.4 billion yuan, far below the average 348.1 billion yuan a month in the first half of 2011. Until very recently, the PBOC and banks typically bought large amounts of dollars from domestic firms eager to sell those received through foreign trade in exchange for yuan to use at home. But that has changed with the slowdown in the domestic economy.

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