Chinese Yuan Falls against the Dollar, After China Widens Currency Trading Band

Last Updated: 16, April 2012

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The Chinese yuan fell sharply against the dollar in early Monday trade, after Beijing widened the currency’s trading limits. According to Beijing, the move will make the yuan more market-oriented as the country seeks to gradually liberalise its exchange-rate regime.

On Saturday, China’s central bank made the announcement that it will widen the yuan’s daily trading band against the dollar to 1 percent, up from the previous 0.5 percent.

With the announcement, the yuan on Monday dropped to its lowest level against the dollar in almost three months.

On Saturday, China’s central bank made the announcement that it will widen the yuan’s daily trading band against the dollar to 1 percent, up from the previous 0.5 percent.

With the announcement, the yuan on Monday dropped to its lowest level against the dollar in almost three months.

Speaking to Bloomberg Businessweek, senior vice-president of treasury and markets, Tommy Ong, at DBS Hong Kong said:

[quote] The yuan is weaker as investors are again worried about Europe and a bit on China’s growth. It is an opportune time for China to widen the band when appreciation expectations are not so strong. That won’t induce any massive speculative bets on its currency. [/quote]

The move comes at a time when the yuan’s immediate outlook seems murky and as pressures for the yuan to appreciate have eased somewhat after recent data showed that the country’s trade has become more balanced after years of recording consistent, huge trade surpluses.

Furthermore, senior officials in China have in recent months discussed openly the need to for more flexibility in the exchange rate and the importance of eventually making the currency fully convertible.

Last month, Chinese Premier Wen Jiabao, hinted that the yuan was reaching its equilibrium peak and would not be appreciating any further.

However, analysts say the slowing Chinese economy would increase pressure for China to further depreciate its currency in the near term.

Welcoming the announcement, IMF managing director Christine Lagarde said:

[quote] This underlines China’s commitment to rebalance its economy towards domestic consumption and allow market forces to play a greater role in determining the level of exchange rate. [/quote]

Japan, too, welcomed the move and said it was in line with the two countries’ financial pact, adding that a flexible yuan would help China’s domestic demand, as well as aid price stability in China.

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