SHANGHAI: The yuan closed lower on Monday, pressured by a rally in the U.S. dollar which erased the Chinese currency's gains earlier in the day.
Spot yuan closed at 6.3093 per dollar, 40 pips weaker than Friday's close. The yuan was stronger at midday, but fell back in the afternoon, tracing the fall in the euro following the release of a German business sentiment survey that came in below expectations.
The yuan's fall occurred despite the central bank setting its daily midpoint at 6.3411, 15 pips stronger than Friday's fix.
Dealers expect strong yuan demand in the run-up to the long holidays in early October and the end of the third quarter, with firms requiring cash to pay bonuses and dividends.
The same seasonal factors have also pushed China's short-term money market rates to seven-month highs, as banks cut back on interbank lending to preserve liquidity in expectation of holiday cash demand and quarterly regulatory assessments.
Tight yuan liquidity raises the cost of swaps used to fund short yuan positions overnight, pumping up demand for the Chinese unit as traders try to close out those positions within the trading day.
"I expect to see the rate dip below 6.30 this week, though whether it stays there will depend a lot on the euro," said a trader at a major state-owned bank in Beijing.
The yuan has risen sharply over the last month, touching a six-month intraday high of 6.2945 last Thursday. That rise has mainly been due to the weakening of the dollar in global markets, as sentiment towards the euro crisis improved and the Federal Reserve launched a new round of bond buying.
