The Chinese yuan continued to tumble on Friday after the government opened the door to further weakness, signaling it would begin measuring it against a multi-currency basket instead of the US dollar.
Other major currency pairings were little changed though as markets prepared for next week’s US Federal Reserve meeting, in which the US central bank is all but certain to undertake the first rate hike in nearly a decade.
The US dollar finished the day slightly lower at US$1.0996 against the euro and at ￥120.86.
The People’s Bank of China announced it would move away from its peg of the yuan to the US dollar and instead measure it against a basket of currencies of its major trading partners to better reflect market realities.
However, the Chinese central bank did not give details on how the basket of currencies would be weighted or when the changes would take effect.
The government sets the rate daily on the yuan, also known as the renminbi, which is currently trading within a 2 percent margin against the greenback.
“The bilateral renminbi-US dollar exchange rate is not considered a good indicator of the international parity of tradable goods,” the bank said in a note on its Web site.
On Friday, the yuan closed at 6.4552 per US dollar, its weakest level since July 2011, down from 6.4386 per US dollar on Thursday.
“Following the shock devaluation back in August, China’s interventions are continuing to cause FX market instability,” Western Union Business Solutions analyst Nawaz Ali said in a market note.
“China appears to be intervening to weaken its renminbi more quickly ahead of next week’s US interest rate decision... US dollar strength in 2015 is proving to be a major drag on China,” Ali said.
Ali said the US dollar’s weakness on Friday appeared to be linked to customary portfolio shuffling at the end of the year.
In Taipei, the US dollar fell against the New Taiwan dollar on Friday, shedding NT$0.050 to close at NT$32.965 on thin trading volume as traders took to the sidelines, waiting for retail sales data from the US due later in the day, dealers said.
Market sentiment appeared cautious on Friday after traders witnessed the yuan fall to a more than four-and-a-half-year low against the US, raising fears of further fund outflows from the region, they said.
Taiwan’s central bank entered the market again to prop up the greenback, helping the US currency recoup most of its earlier losses, they said.
However, on a weekly basis, the greenback gained ground against the local currency, which closed at NT$32.822 on Dec. 4.
In the UK, analysts said the pound is shaping up to approach the year-end on a positive note versus the dollar, even with the Fed set to raise interest rates.
A string of reports are due to show an improvement in the UK economy next week with, crucially, inflation set to turn positive, according to analysts surveyed by Bloomberg. Given the Fed’s repeated hints that it will raise rates at its meeting on Tuesday and Wednesday, the prospect is largely priced into markets. Sterling has risen against its US counterpart for the past two weeks as the final US policy meeting this year approaches.
“Inflation figures next week are key,” said Aurelija Augulyte, a senior foreign-exchange strategist at Nordea Markets in Copenhagen. “Core inflation has been pressured down by past pound strength, but now the effect is fading. Earnings growth should also keep above the 2 percent per annum pace, so faster than in the US. All in all, pound-dollar strength.”
The pound rose 0.6 percent this week to US$1.5206 as of 5pm in London, up from a more than seven-month low of US$1.4895 on Dec. 2.
It could climb to as high as US$1.54 by the end of next week, said Aurelija Augulyte, a senior foreign-exchange strategist at Nordea Markets in Copenhagen. Sterling slipped 0.4 percent to ￡0.7229 per euro, its third week of declines.
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