SHANGHAI: China's yuan traded at a five-month low against the dollar on Monday, but the currency avoided any steep losses as Beijing continued to set a strong official guidance rate.
Earlier in the day, the central bank kept a key policy interest rate steady as widely expected when rolling over maturing medium-term loans, and drained some cash from the banking system through the bond instrument.
The yuan was trading at 7.2382 per dollar at 0248 GMT, barely changed from the previous close but very close to the weaker side of the 2 per cent daily trading band.
The currency hit a five-month low of 7.2386 in early trade.
The central bank's daily benchmark fixings and support from state-owned banks have slowed the pace of declines in the yuan, which is down 1.9 per cent this year.
China's relative low yields versus other developed economies and outflows of foreign investment from an anaemic stock market have maintained pressure on the currency.
Prior to the market's opening, People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2 per cent band, at 7.0979 per U.S. dollar, 1499 pips stronger than Reuters' estimate.
The spot yuan opened at 7.2355 per dollar and was changing hands at 7.2382 at midday, 10 pips weaker than the previous late session close and 1.98 per cent weaker than the midpoint.
With the yuan nearing the 2 per cent trading band in the spot market, the PBOC's ability to stabilise its value through the daily fixing rate faces constraints, said Tommy Xie, head of Asia macro research at OCBC.
"Allowing the fixing rate to follow market dynamics risks triggering speculation on RMB depreciation. Conversely, maintaining a stable fixing rate amid U.S. dollar appreciation could lead to passive RMB appreciation against its currency basket, as evidenced by a recent surge in the RMB index last week," Xie said.
China's trade-weighted CFETS yuan basket index rose to 100.32 on Monday, the highest level since March 2023, according to Reuters estimates.
The global dollar index fell to 105.98 from the previous close of 106.038, but still hovered around the strongest level since November 2023.
The offshore yuan was trading 218 pips weaker than the onshore spot at 7.26 per dollar.
