China's spot yuan posted its largest quarterly decline against the dollar on record in April-June as the Chinese economy slowed and Europe's festering debt crisis pushed the U.S. currency higher.
The yuan has appreciated 5 percent against the euro this quarter as the crisis in Europe has deepened, causing investors and central banks to increase dollar purchases.
The yuan declined 0.9 percent against the dollar in nominal terms so far this quarter, the biggest quarterly depreciation since the establishment of the China Foreign Exchange Trade System in 1994.
However, the yuan's nominal effective exchange rate (NEER), or its value against a trade-weighted basket, remains strong in part due to the weakness of the euro.
The yuan's nominal effective exchange rate (NEER), its value before inflation adjustments, rose 0.88 percent to 106.06 points in May from 105.14 in April, the Bank of International Settlements (BIS) index showed.
"The yuan's appreciation is capped by the weak global market," said a dealer at a Chinese commercial bank in Shanghai.
"But we still believe the central bank will not allow the yuan to depreciate too much," he said, adding that a sharp fall in the yuan could harm China's economy by encouraging rapid capital outflows.
"If there is any signal showing the eurozone situation is improving, the yuan still has potential to rise," he added.
"The euro is crazy, so the yuan tracks it," said a dealer at a Chinese commercial bank in Shanghai.
Some dealers speculated that some big banks were selling dollars in the market on the central bank's request to keep the yuan from declining too abruptly.
A radical slide in the yuan's value would destabilize currency markets and potentially impact global trade.
The spot closed up slightly on Friday, despite weakness in the midpoints set by the People's Bank of China, due to a strong rebound in the euro after European leaders unexpectedly agreed to take emergency action to help eases strains on Italy and Spain.
Leaders agreed to create a single supervisory body for eurozone banks and allow them to be recapitalized directly by the currency area's rescue fund without adding to government debt.
The PBOC set the yuan's midpoint at 6.3249 on Friday, 59 pips weaker than Thursday's fix Of 6.3190. But the spot yuan did not follow the midpoint's fall, rising to 6.3541 from Thursday's 6.3575.
Offshore, one-year non-deliverable forwards (NDFs) were bid at 6.4110 and offshore deliverables of the same tenor traded at 6.4460. Onshore yuan forwards also suggested depreciation, bidding at 6.3963.
Offshore spot yuan fell from the onshore spot at 6.3610 per dollar at close.
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