Spot yuan slips, no quick sign of China policy change

An employee bundles yuan banknotes at a bank in Changzhi, Shanxi province April 8, 2010.

SHANGHAI (Reuters) - Spot yuan fell back slightly against the dollar in early trade on Friday, showing no signs of an imminent rise in the value of the Chinese currency after a New York Times report pushed the yuan to close at its highest level since October 2009 a day earlier.

Dollar/yuan offshore forwards bounced from their lowest since July 2008 hit on Thursday, which came after the New York Times reported China was close to announcing a currency policy shift that would involve a small but immediate revaluation of the yuan.

The key factor that sparked investors' caution on Friday was that the Chinese central bank fixed the yuan's daily mid-point, or its reference rate from which the currency can move as much as 0.5 percent during the day, at 6.8260 per dollar, compared with 6.8259 in the previous session.

"The fixing dampened bullish sentiment towards the yuan triggered by the New York Time report yesterday," said a senior trader at a major Chinese state-owned bank in Beijing.

"But as the yuan has already been pushed to such a high level of political attention, nothing can be ruled out, even a one-off revaluation."

Reflecting such a psychology and playing catch-up to offshore forwards, the benchmark one-year onshore forwards fell slightly to 6.7267 in early trade from Thursday's close of 6.7380, its highest level since Feb. 22.

Twelve-month yuan appreciation implied in the onshore forwards, measured from the Chinese central bank's mid-point, rose to 1.48 percent from 1.30 percent on Thursday.

Spot yuan fell back to 6.8252 yuan per dollar versus Thursday's close of 6.8245.

"Expectations of yuan appreciation have anyway been greatly strengthened over the past week or so, with signs that both China and the United States have been seeking a solution to their currency dispute," said a dealer at a major European Bank in Shanghai.

U.S. Treasury Secretary Timothy Geithner paid a surprising and lightening visit to China on Thursday, meeting Chinese Vice Premier Wang Qishan in Beijing, with the market widely expecting the officials to have discussed the currency issue.

A short U.S. Treasury statement after the meeting, which made no mention of currencies, said the two men exchanged views on U.S.-China economic relations and the global economy.

They also discussed other issues related to a U.S.-China Strategic and Economic Dialogue meeting due to be held in Beijing in late May.

Offshore, the three-months non-deliverable forwards (NDFs) rose to 6.7518 in early trade, from Thursday's close of 6.7450, implying yuan appreciation of 1.10 percent in three months, down from 1.20 percent implied on Thursday.

Benchmark one-year NDFs rose to an intraday high of 6.6221 from Thursday's close of 6.6160, with implied 12-month yuan appreciation falling to 3.08 percent from Thursday's 3.17 percent.