ET:Yuan edges up to 8-week closing high, tracks global dollar moves
SHANGHAI: China's yuan edged up to an eight-week closing high on Friday in light trade and mild volatility as the dollar continued to soften in global markets.
The dollar index has weakened since reaching a two-year high in late July, as weak U.S. data raised the possibility of the Fed launching QE3. The yuan and other Asian currencies have strengthened as a result.
Traders are waiting to see if U.S. Federal Reserve chief Ben Bernanke would give hints on a fresh round of quantitative easing. Bernanke will speak at a meeting of central bankers at Jackson Hole, Wyoming, later on Friday (1400 GMT).
"I think it's a combination of the dollar index and client flows," said a trader at a foreign bank in Shanghai, explaining the yuan's rebound this month.
Spot yuan closed at 6.3484 per dollar on Friday, 12 pips stronger than Thursday's close. The slight strengthening occurred despite the central bank's setting its daily midpoint
at 6.3449, 14 pips weaker than Thursday's close. Traders attributed the discrepancy to a weakening of the dollar index in morning trade in Asia. The slight fall erased a portion of the gains the greenback had chalked up overnight, which had prompted the central bank's weaker fix.
Another factor supporting the yuan this month has been tight yuan liquidity in China's interbank market.
Reflecting the tight conditions, swap points for tomorrow/next foreign exchange swaps, which FX dealers use to hedge their overnight long dollar positions, have risen.
Such a swap allows a bank to swap dollars for yuan tomorrow and then reverse the transaction on the following day. Tight yuan liquidity in China's money market has raised the price of such swaps in recent weeks.
"If you carry a dollar-long position overnight, then you will have to pay 5 to 6 pips per day, which leads to interbank market makers being unwilling to carry this position," said the Shanghai trader.
The yuan has fallen 0.8 percent this year as the euro crisis has spurred safe haven demand for dollars and China's domestic economy has slowed. But traders are now reluctant to predict the trajectory of the currency for the rest of the year.
The link between the yuan and the dollar index has strengthened this year, as China has taken steps to open its capital account and granted the yuan more space to rise or fall within a single day.
