Yuan Falls vs Dollar
After Geithner's Comments

LU JIANXIN / Reuters 23jan2009

SHANGHAI — The yuan fell against the dollar on Friday and traded mostly below the central bank's mid-point amid speculation that comments on Chinese currency policy by U.S. President Barack Obama's choice for treasury secretary could spark a brief period of modest yuan depreciation.

Timothy Geithner said on Thursday that President Obama believed China was "manipulating" its currency, using a term the Bush administration had deliberately avoided for years to describe Beijing's foreign exchange practices.

Washington would aggressively use all its diplomatic tools to press Beijing to move faster on currency reform, Geithner, the New York Federal Reserve Bank president, said in response to written questions from the Senate Finance Committee, which voted 18-5 on Thursday in favour of his nomination. [ID:nN22364222]

An official at the Chinese central bank said on Friday the bank was awaiting an official Chinese government response to the U.S. comments. [ID:nSHA335796]

"We have noticed such reports. We have reported them to relevant government departments and are awaiting a response," the official told Reuters by telephone. He declined to elaborate.

But dealers trading in the domestic market, the China Foreign Exchange Trade System , thought it was unlikely that U.S. pressure would result in a significant yuan rise, in particular at a time when China's economy is slowing sharply.

China's economic growth slumped to 6.8 percent last quarter, dragging down the pace of expansion for all of 2008 to a seven-year low of 9.0 percent as the global financial crisis took its toll, data showed on Thursday. [ID:nPEK340437]

NO MOOD FOR YUAN STRENGTH

With the Chinese export sector slumping, driving up unemployment, and Beijing facing domestic criticism from many business interests over past appreciation of the yuan, authorities will be in no mood to permit any yuan strength that could hurt exports and the economy further, dealers said.

"Such U.S. comments, if they become official policy, will only lead to tit-for-tat moves from the Chinese side," said a dealer at a major European bank in Shanghai.

"As China continues generating big trade surpluses, it is not in its interests to devalue the yuan and spark competitive depreciation with other Asian and global currencies," he said.

"But it could allow the yuan to depreciate slightly and for a short period to express its displeasure, as it has in the past."

No such move was apparent on Friday, however, when the Chinese central bank set the yuan's mid-point against the dollar <CNY=SAEC> at 6.8380, little changed from the reference rate of 6.8373 on Thursday.

Spot yuan <CNY=CFXS> was trading at 6.8415 against the dollar at midday on Friday, having held mostly below the psychologically important 6.8400 level during the morning, down from Thursday's close of 6.8371, also reflecting the U.S. Treasury nominee's comments on a strong U.S. currency.

Geithner reiterated the long-standing U.S. currency policy mantra that a strong dollar was in the United States' interest.

Dealers said the remarks fuelled expectations that the dollar could rise sharply when the Chinese market is closed next week for the Lunar New Year holiday.

Offshore non-deliverable forwards responded to the remarks by implying greater yuan depreciation.

One-year dollar/yuan NDFs <CNY1YNDFOR=> had risen to 7.0550 by midday from 7.0400 at Thursday's close, implying yuan depreciation over the next 12 months from the day's spot mid-point of 3.08 percent, more than the 2.88 percent implied on Thursday.

source: 24jan2009