Yuan Weakens Beyond Year-End Estimates as PBOC Lowers Fixing

(Bloomberg) -- China’s yuan fell past the level that it was forecast to reach by year-end, accelerating declines as policy makers signaled tolerance for further weakness amid a surge in the dollar and a tumble in exports.

The exchange rate in Shanghai retreated 0.3 percent to 6.7629 per dollar as of 5:15 p.m., dropping to a six-year low and extending its third straight weekly loss. The central bank weakened its daily reference rate by the most since August. The yuan is estimated to end this year at 6.75, according to the median of forecasts in a Bloomberg survey. In Hong Kong, the offshore yuan plunged as much as 0.38 percent to 6.7736, near the weakest level since trading began in 2010.

The currency has come under increased pressure of late, with some analysts speculating that the central bank has reduced support after the yuan entered the IMF’s reserves on Oct. 1 and as the dollar rose to a seven-month high. The onshore yuan has declined in all but one session this month as the People’s Bank of China allowed a drop past the 6.7 level that was previously seen as its line in the sand. The yuan’s advance against a trade-weighted index halted after data showed exports fell the most since February.

“The continued dollar strength has weighed on the yuan,” said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. “The PBOC won’t fight dollar strength, and it won’t draw a line, at least in the next few weeks.”

The yuan traded in Shanghai has declined 1.4 percent this month as expectations of a U.S. rate rise fueled a dollar rally. The currency is now just 1 percent off 6.83, the level at which China pegged the yuan after the 2008 global financial crisis. This is a turnaround from the August-September period, when policy makers were suspected of propping up the yuan before a Group of 20 summit and the yuan’s entry into the International Monetary Fund’s Special Drawing Rights.

Deutsche Bank AG predicts a bumpier ride ahead, saying that Chinese demand for the greenback will rise in the next three months because currency conversion and lending quotas are reset in the new year and banks accumulate more dollars to prepare for higher overseas credit card spending during Chinese New Year in late January. The U.S. currency has seen a surge of late, with the odds of a Fed rate increase this year shooting up to 68 percent from just 12 percent at the beginning of July.

--With assistance from Justina Lee To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Sarah McDonald

With assistance from Helen Sun