Yuan Drops Most in Three Months as China Widens Band

The yuan weakened by the most in almost three months against the dollar, as China’s central bank doubled the daily trading band, reflecting declines in emerging- market currencies.

The People’s Bank of China now allows 1 percent moves from a daily fixing, after keeping the limit at 0.5 percent since May 2007. The Dollar Index, tracking the greenback against currencies of trading partners, climbed 0.3 percent, after a 0.8 percent jump on April 13 on concern Europe’s debt crisis is deepening. One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, jumped 33 basis points to 2.625 percent, the highest since Sept. 30.

The yuan fell 0.24 percent to 6.3183 per dollar as of 9:49 a.m. in Shanghai, according to the China Foreign Exchange Trade System. It dropped as much as 0.35 percent earlier. The People’s Bank of China set its fixing 0.13 percent lower at 6.2960 per dollar. The yuan weakened as much as 0.46 percent from that rate, not making use of the new limit.

Offshore Trading

In Hong Kong’s offshore market, the yuan declined 0.19 percent to 6.3112 per dollar. Twelve-month non-deliverable forwards dropped 0.2 percent to 6.3453, 0.4 percent weaker than the onshore spot rate, according to data compiled by Bloomberg

“The move is not likely to have an immediate or large impact on the yuan,” said Nizam Idris, head of foreign-exchange strategy for Asian markets at Macquarie Group Ltd. “The decision underlines China’s confidence that the economy is on a sound footing. We maintain the view that the yuan will continue to see pressure for appreciation.”

Idris forecast the yuan will end 2012 at 6.10, giving the currency a more moderate 3.5 percent appreciation, compared with the 5 percent annual gain in recent years. The yuan has fallen 0.42 percent this year, the second-worst performer in Asia after the yen.

New Rules

A more flexible yuan may help central bank Governor Zhou Xiaochuan control inflation and support an economy that the World Bank sees growing 8.2 percent this year. The timing of the move may be intended to mute criticism of Chinese currency policies at International Monetary Fund and Group of 20 meetings and indicates that the scandal engulfing former Chongqing chief Bo, 62, will fail to stall the nation’s economic opening up.

The new rules for yuan trading follow increases in quotas for foreigners buying stocks and bonds in China and in the amount of yuan held offshore that can be invested locally. A five-year plan running through 2015 calls for officials to keep loosening controls on capital flows as the nation moves towards a convertible currency.

President Barack Obama’s administration says Beijing still keeps the exchange rate artificially weak, hurting American manufacturers and contributing to a U.S. trade deficit with China that rose 8 percent to $295 billion last year.

“They are confident that market reaction would be for more two-way moves, rather than a lopsided bet on yuan appreciation,” Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong, wrote in a report today. “This follows from their assessment that the yuan is largely at equilibrium level.”

An unexpected surge in new loans in March, reported last week, showed that the ruling Communist Party is trying to avoid a deeper growth slide as the nation prepares for a once-a-decade power transfer to younger leaders.