Yuan Down Late On Dollar Strength

As key Chinese economist cautioned that appreciation of local currency will drive exporters out of business, China’s yuan slid lower against the U.S. dollar late Friday afternoon due to the U.S. unit’s strength against other major currencies during Asian trading hours.

Comments by Chinese bankers today underscores the domestic political pressures on Beijing amid growing international calls for China to let the yuan rise.

Vice Commerce Minister Zhong Shan told Wall Street Journal Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%.

On the over-the-counter market, the dollar was at CNY6.8265 around 0930 GMT, up from Thursday's close of CNY6.8261. It traded between CNY6.8258 and CNY6.8267, Dow Jones reported.

The ICE Dollar Index, which tracks the U.S. currency against a trade-weighted basket of currencies, rose to 80.429 at 0930 GMT from 80.272 late Thursday in New York.

However, the dollar's gains in China's onshore market were capped by the steady central parity. The dollar-yuan central parity was set at 6.8263, almost unchanged from 6.8262 Thursday.

“The market is quiet today, as the strength in the overnight dollar only pushed the central parity higher by one point,” said a Shanghai-based foreign bank trader.

Traders said they expect the dollar to climb in the onshore market as dollar demand is likely to increase because of import payments at month-end.

Offshore, one-year dollar-yuan nondeliverable forwards were at 6.6601/6.6641, down from 6.6650/6.6700 late Thursday.

Mr. Zhong talked about a potential tipping-point effect to describe the fragile situation of many exporters. “Water doesn’t boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree,” he said. Likewise, “a further rise in the yuan by a very small magnitude might cause fundamental changes” to exporters in China, he said.

The yuan climbed 21% against the dollar from 2005 to 2008, when China adopted a managed-float currency system under which the yuan’s value was linked to a basket of currencies. But the yuan has been kept almost unchanged against the dollar since the outbreak of the global crisis to help Chinese exporters, which has prompted much criticism from abroad.