Yuan Weakens to Nearly Three-Month Low Against Dollar

By Carolyn Cui 

        The yuan weakened against the dollar in trading outside of China on Tuesday amid worries that the government's aggressive moves to salvage a plunging stock market could backfire on the country's economy.
        In New York trading, the price for the offshore yuan fell to as low as 6.2279 per dollar, the weakest level since April 13. The level was 1.8% lower than Tuesday's official rate of 6.1166 per dollar fixed by China's central bank.
        And the outlook for the currency, also called the renminbi, is dimming. In the forward market, where foreign-exchange rates for a future date are locked in, investors are betting the yuan will weaken to 6.4064 per dollar in a year, a 3% depreciation from the current level.
        The Chinese currency has weakened as foreign investors yanked money out of the country during the epic slump in the country's stock market, traders said. The decline has erased trillions of dollars of investors' wealth since early June. Despite various measures taken by the Chinese authorities to stem the fall, investors are growing concerned about the selloff's effect on the world's second-largest economy.
        "Traders think the weakness of the equity market could spill over to the economy," calling for more monetary-easing policies, said Koon Chow, a senior strategist at Union Bancaire Privee, a Swiss private bank, which manages $3 billion in emerging-market assets.
        These policies could include a weakening of the exchange rate to help exporters, Mr. Chow said.
        Different exchange rates are quoted for the yuan depending on whether the currency is traded on mainland China or offshore. Traders watch the offshore rate because it is less influenced by state control than the mainland rate.
        When the offshore rate trades below the mainland rate, that is typically an indication of flagging non-Chinese demand for the currency. China's central bank controls the onshore rate by setting a daily reference rate for the yuan, but allowing it to trade 2% above or below that level.
        So far this year, the Chinese currency has been resilient, while many other emerging-market currencies have fallen considerably in value against the dollar as the U.S. gets closer to the first rate increase. In fact, the yuan has been bucking the trend recently, getting stronger against the dollar since March as the Chinese economy improved. Year to date, the Chinese currency has only lost 0.02% against the dollar.
        But sentiment has soured recently. Some Wall Street analysts say the decline in the forward market was driven by equity investors who are reducing or planning to reduce their exposure to Chinese shares. These investors might have converted their future yuan receipts into the dollar to prevent more losses in the foreign-exchange market.
        However, shorting the yuan is a risky gambit, as the Chinese government wants and is able to keep the exchange rate stable, analysts say. China is pushing for the yuan to become a reserve currency, and stability in the yuan's value will encourage greater global acceptance, analysts say. The International Monetary Fund is scheduled to decide later this year whether to endorse the currency by including it in its reserve basket.
        In late June, Chinese officials pledged to reduce its currency interventions only to counter damaging swings in exchange rates. The PBOC's reference rate for the yuan on Tuesday was stronger than Monday's fix at 6.1172, indicating the government's intention to keep the exchange rate stable. If the spot market continues to weaken, the PBOC is likely to push the fix to an even higher value for the yuan, analysts say.
        "Influencing the exchange rate is a lot easier than influencing the stock market," Mr. Chow said.
        Write to Carolyn Cui at carolyn.cui@wsj.com
        (END) Dow Jones Newswires

        July 07, 2015 17:13 ET (21:13 GMT)

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