SHANGHAI: China's yuan slipped against the dollar on Tuesday, as the central bank set a slightly weaker-than-expected midpoint fixing for the second day in a row, a signal that investors interpreted as an official intention to reinforce currency stability.
Most emerging market currencies strengthened to reflect the broad dollar weakness, as investors anxiously awaited fresh developments in U.S. President Donald Trump's trade policy and ongoing concerns over the U.S. fiscal outlook.
However, the yuan underperformed its peers as the central bank pivoted from preventing excess losses in the Chinese currency over the past six months to slowing yuan rallies, currency traders and analysts said.
"We believe policymakers are likely to still adopt a measured approach to appreciation like how they took on a measured approach when USD/RMB was trading higher previously," said Christopher Wong, FX strategist at OCBC Bank.
The yuan has strengthened about 1.1% to the dollar so far this month, below gains seen in other Asian currencies, such as the Korean won or Taiwan dollar.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1876 per dollar, and 34 pips weaker than a Reuters' estimate of 7.1842.
"In the near term, the PBOC may turn more cautious against yuan appreciation bias if the dollar sell-off persists," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
"In this sense, the PBOC may use the yuan fixing to smooth out yuan appreciation bias amid the dollar decline, driving the yuan basket index lower to support export sector."
The CFETS yuan basket index, a gauge that measures the yuan's strength against its major trading partners, eased to 95.8 on Tuesday and has lost about 5.6% so far this year.
The spot yuan, however, has gained 1.6% versus the dollar. As opposed to a persistently strengthening bias in the official guidance fix since November, the weaker-than-expected fixing discouraged market participants from testing new highs in the yuan, said a trader at a Chinese bank.
As of 0349 GMT, the onshore yuan was 0.05% lower at 7.1903 per dollar, while its offshore counterpart was down about 0.09% in Asian trade to 7.1840.
Seasonal demand also weighed on the yuan, as many overseas-listed Chinese companies usually have higher foreign exchange needs to make dividend payments to their overseas shareholders between May and August.
Separately, the market largely shrugged off April industrial profit data, which picked up pace, giving policymakers cause for optimism that recent stimulus efforts are helping to keep the economy afloat despite trade tensions with the United States.
Investors will look to May manufacturing activity data due on Saturday for more clues on the health of the economy. - Reuters
