If it sets Friday’s mid-point below Thursday’s level, at 6.4010 to the dollar, it could fan speculation that China wants a deeper fall in the yuan to spur exports to support the economy, said some analysts.
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China, fearful of the rate of decline in the yuan’s value was then rumoured to have intervened by selling US dollars and buying the yuan thereby supporting the currency and stemming any further losses, this behaviour is believed to have continued into Thursday’s trading session. The dollar came under pressure this week as the market instability caused by China’s devaluation curbed expectations that the U.S. Federal Reserve’s long-awaited interest rate increase would come as early as in its September 16-17 meeting.
The cut, and two subsequent reductions, sent global financial markets into a tailspin as it raised questions over the health of the world’s second-largest economy and sparked fears of a possible currency war.
The Chinese yuan flatlined on Friday, with the exchange rate barely budging and volumes low, as traders said a combination of soothing messages from regulators and buy orders from state banks kept the market in check.
The improved mechanism takes into consideration the closing rate of the interbank forex market on the previous day, as well as supply and demand in the market, and price movement of major currencies.
“The central bank, if necessary, is fully capable of stabilizing the exchange rate through direct intervention in the foreign exchange market to avoid (the) herd mentality resulting in irrational movements of the rate”, Massachusetts was quoted as saying by the official Xinhua news agency. Beijing said the change was aimed at making the tightly controlled currency more market-oriented.
“This week it has really been all about China’s move and trying to interpret what its broader impact might be”, said Stephen Freedman, senior investment strategist at UBS Wealth Management.
“The move signals that (China) is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy”, said Eswar Prasad, an global economist at Cornell University. Vietnam’s dong slid 1.3 percent after the central bank widened the currency’s trading band Wednesday.
Japan’s Nikkei 225 rose 1 percent to 20,595.55 and South Korea’s Kospi gained 0.4 percent to 1,983.46.
The People’s Bank of China (PBOC) said on Thursday that there are no grounds for persistent and substantial depreciation of the yuan in the long run while vowing to step in to prevent excessive swings.
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The Chinese currency fell for a third day but by late afternoon its decline was only 0.2 percent compared with drops of up to 1.9 percent on the previous days.
