Yuan drops after PBOC sets new trading midpoint

The yuan dropped against the dollar on Monday after the central bank fixed the daily trading midpoint at the weakest level in eight months.

The People's Bank of China (PBOC), the central bank, fixed the central parity rate - the yuan's trading midpoint against the dollar - at 6.1699 Monday, up by 18 basis points from Friday, according to the China Foreign Exchange Trade System.

The currency slipped to 6.2392 to the dollar when trading closed on Monday, compared with 6.2361 per dollar on Friday, after the PBOC fixed the new midpoint, which was the highest since September 6, 2013.

China's economic slowdown, which has been more severe than many market watchers had expected, has driven the depreciation, Liu Dongliang, a foreign exchange analyst at China Merchants Bank, told the Global Times on Monday.

China's exports fell 3.4 percent in the first quarter from the same time last year, while imports were up 1.6 percent, the General Administration of Customs said on April 10. The country also saw a fall in its trade surplus to $16.7 billion, down 59.7 percent from a year earlier.

"China's first-quarter trade figures, which were very disappointing, added to the depreciation pressure," Liu said.

Meanwhile, the US Federal Reserve has begun discussing options for raising interest rates as the country's economy improves, according to the minutes of the Federal Open Market Committee's April meeting, which were released on Wednesday.

A rise in interest rates in the US will increase demand for the dollar, which will drive up the currency's price in the foreign exchange market, and a stronger dollar will also fuel a slide in the yuan, Zhang Lei, a macroeconomic analyst with Minsheng Securities, told the Global Times on Monday.

The PBOC engineered a 3.3 percent drop in the yuan in the first four months this year to shake off speculators betting on a one-way rise in the currency, Reuters reported on Monday.

China has promised several times since late last year to reform its exchange rate formation mechanism, and the PBOC widened the trading band of the yuan from 1 percent to 2 percent on March 15.

However, the yuan could start appreciating again as early as in July, Liu said. "The yuan could strengthen to less than 6 yuan per dollar if the country reports more positive economic data," he said.

Zhang said the yuan is likely to be worth between 6.13 and 6.1 per dollar at the year-end.