SHANGHAI: China's yuan skidded to a nine-month low on Monday, yielding to pressure from a weak euro and month-end dollar demand.
The dollar-yuan rate in recent months has closely tracked the performance of the dollar index, which tracks the greenback's value against a basket of currencies dominated by the euro.
The euro hit a 25-month low against the dollar in early Asian trade, where it also hit a 12-year trough against the yen.
"The link to the euro is quite intimate," said a trader at a Chinese joint-stock bank in Shenzhen.
The yuan hit the lower limit of its trading band on Friday after the central bank pushed back against the dollar's global strength with a daily midpoint of 6.3112, the strongest fix since mid-June.
"The central bank sent a signal that they won't let the yuan fall too far," said a trader at an Asian bank in Shanghai.
Indeed, the level at which the yuan hit limit-down on Friday, 6.3743, was well within the currency's recent range, but the stronger midpoint shifted that level to the weak end of the allowable band.
The midpoint fixing is the base rate that the central bank uses to flag the government's intentions for the yuan's value, and from which the yuan is allowed to rise or fall 1 per cent in the course of a single day.
On Monday, the People's Bank of China (PBOC) returned to its usual pattern of setting a weaker midpoint in response to a stronger dollar overnight, setting its fix at 6.3270.
The weaker fix gave the market the green light to respond to the strength of the dollar globally.
Spot yuan closed at 6.3864 per dollar, down 129 pips weaker Friday's close, after hitting an intraday low of 6.3878 in morning trade, its lowest level since late September 2011. At 0.2 per cent, it was the yuan's biggest one-day fall in per cent terms since April 5.
In addition to the weak euro, traders also say that demand for dollars is likely to rise this week, as corporate forex demand typically rises near the end of the month.
Such a spike would occur on top of the more general increase in customer demand for dollars in recent months, as corporates have adjusted their foreign exchange behavior in response to the end of previously entrenched expectations of yuan appreciation.
But traders say that the central bank will not give the yuan unlimited freedom for additional large-scale weakening, even if the euro falls further.
"The yuan may reach 6.40, but it's hard to imagine it weakening much further than that," said the trader in Shenzhen.
Offshore, one-year non-deliverable forwards were bid at 6.4260 near in late afternoon, implying 0.62 per cent depreciation over the next 12 months, basically flat with Friday's close.
Offshore yuan traded at 6.3850 in late afternoon, in line with the onshore rate.
