China's yuan jumped against the dollar on Friday to its highest since a landmark 2005 revaluation but its broader gains were less impressive as it slumped against the euro.
Traders and analysts said the moves suggested the Chinese central bank wanted to hold the yuan's overall value steady against a basket of currencies by offsetting gains made against the dollar with losses against the euro.
In a sign it was condoning for now a yuan rise against the dollar, the Chinese central bank set the yuan's reference rate against the dollar on Friday at 6.7720 CNY=SAEC, the highest since the 2005 revaluation.
But against the euro, which surged overnight on a bout of short-covering, the central bank engineered a sharp fall in the yuan by pushing the reference rate down by the most in any day since March 2009. The yuan's Friday reference rate against the euro was set at 8.4741 EURCNY=SAEC, down 2.2 percent from Thursday.
It seems like they are trying to keep the yuan steady in a range against a basket of currencies, said one trader at a major Chinese bank.
The yuan ended up on the dollar at 6.7711 CNY=CFXS after climbing as far as 6.7696. It had ended Thursday's trade at 6.7810.
SOURCE OF TENSION The value of the yuan has been a perennial source of tension between China and the United States, where several top lawmakers have accused China of holding down the yuan to get an unfair edge in trade. China has always denied those allegations.
But in a landmark move on June 19, China abandoned the yuan's controversial peg to the dollar, which had been in place since mid-2008 to help Chinese exporters survive the global financial crisis. Since June's depegging, the yuan has risen 0.81 percent against the dollar, a large move by traditional standards as it has spent most its life chained to the dollar, often moving less than 0.2 percent on any day.
Traders said the way the central bank jacked up the yuan's reference rate against the dollar on Friday was taken as a sign that it could tolerate the yuan rising on the U.S. currency. Everyone was selling the dollar today after the reference rate was set, with clients mostly leading the selling, said a trader at a Chinese bank.
The yuan's jump against the dollar led investors outside China to sell non-deliverable forwards (NDFs) CNYNDFOR= on the view that the yuan would keep rising in coming months. Three-month NDFs CNY3MNDFOR= dropped to 6.7700, implying that investors eyed a 0.03 percent rise in the yuan in three months from the day's mid-point. The implied appreciation had been 0.09 percent on Thursday, from a much weaker mid-point.
One-year NDFs CNY1YNDFOR= also fell initially, but recouped losses by the end of the day as traders took profits. The contract were at 6.6690 in late trade, implying a 1.54 percent gain in a year, versus Thursday's 1.77 percent.
Against the euro, the yuan was lower at EURCNY=CFXS 8.4660 after sliding as far as 8.4850, compared with Thursday's 8.3330. Since the June depegging, the yuan has slipped 0.07 percent against the euro.
But that is small beer compared with the yuan's gains against the common currency in 2008, when it jumped 10.4 percent. It gave up some of those gains in 2009, slipping 2.5 percent. Indeed, the yuan's strength against the euro has led some in China to worry that it could slow Chinese exports to Europe. The Commerce Ministry said as much in May by noting that some exporters were feeling the pain.
China's central bank manages the yuan's daily movements by setting a series of reference rates every day before the start of trade. Against the dollar, the yuan can rise or fall 0.5 percent each day from its reference rate, also known in the market as the mid-point. Against other currencies, including the euro, the yuan can move 3.0 percent. ($1=6.780 Yuan) (Editing by Edmund Klamann)