Yuan's drops promote 2-way fluctuation expectation

The Chinese currency renminbi, or the yuan, weakened 22 basis points to 6.3235 against the U.S. dollar on Thursday, according to the China Foreign Exchange Trading System. The retreat, which was pushed by a stronger dollar as investors rushed to buy the greenback in the wake of rising Greek default risks, marks the fourth straight trading day of decline against the U.S. dollar. It underscores a rising trend of the yuan being traded both ways against the U.S. dollar, which goes against the view of the yuan's one-way appreciation that has long dominated the market, analysts said. The yuan started dropping against the U.S. dollar more frequently in the second half of last year, said foreign exchange dealers, who expected the trend to be more obvious this year. The yuan weakened 316 basis points in total in the first six trading days of March, after hitting 6.2919 against the U.S. dollar on Feb. 29, a record high since the country started reforming its exchange rate formation mechanism in 2005. In January, the yuan fell 305 basis points against the U.S. dollar during the first eight trading days of the month, triggering talks whether it was a chance for the country to expand the yuan's two-way fluctuation ranges. While asked to comment on the timing, Yi Gang, vice governor of the central bank, on Wednesday told Xinhua that the country will steadily push the expansion while guarding against risks. "Our policy aims to stabilize the yuan's exchange rate at a reasonable and balanced level, and the direction to let the market play a role is unswerving," Yi said. A wider range of yuan's fluctuations will help raise the current daily cap put on losses and gains of the yuan's exchange rate, and let the yuan's value move both ways rather than just rise against other currencies, the U.S. dollar in particular. In China's foreign exchange spot market, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day. The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices before the opening of the market each business day. Statistics show that the yuan has appreciated against the dollar by over 30 percent since 2005 when the country launched the yuan's exchange rate formation mechanism. Many believe that the yuan's exchange rate has approached a "balanced" level, which does not necessarily mean an end to yuan's appreciation, but implies that the room for the yuan to rise further probably is small in the short term. Minister of Commerce Chen Deming said Wednesday that the yuan's exchange rate has entered a reasonable range, and the government should increase the flexibility of its changes while keeping it at a stable level. Li Daokui, an adviser to China's central bank shared the view, saying that the government should take the next step to relax the daily limit on the yuan's fluctuations since its exchange rate was almost at a balanced level, and suggesting a 0.7 - 0.75 percent cap. China has pledged to reform its exchange rate formation mechanism in a gradual and controlled manner. Premier Wen Jiabao said in a government work report delivered on Monday that the country will work to increase the flexibility of the yuan's two-way fluctuations. Zhou Xiaochuan, the central bank governor, also said recently that the fluctuation range of the yuan's exchange rate can be widened to a certain extent so as to let it based more on the market supply and demand.