Yuan Exchange Rate Relative to Dollar Tumbles to Six-Year Low

(Beijing) — China's central bank set the midpoint of the yuan at 6.7690 per U.S. dollar on Monday, up from 6.7558, setting the yuan's exchange rate relative to the dollar at its weakest since September 2010.

Experts are expecting further depreciation of the yuan as the euro and British pound also continue to weaken against the U.S. dollar.

The yuan's value has been in a virtual free fall since late September.

The central parity rate is set based on price quotations from market makers each day. Spot trading prices are allowed to fluctuate within 2% on either side of the midpoint.

The yuan's value against the U.S. dollar had been generally on the increase from September 2010 through March 2015 before stabilizing at about 6.2 yuan per dollar. But the yuan started to fall after August 2015, when the yuan joined the basket of currencies in the International Monetary Fund's Special Drawing Right international reserve asset. The change had the yuan midpoint follow the SDR basket of currencies instead of just the U.S. dollar.

But the U.S. currency still plays a significant role in the yuan's value, experts said.

"The latest round of renminbi depreciation is mainly a result of the U.S. dollar's rise of value against other major currencies, especially the British pound," said Wang Tao, chief China economist at UBS AG. "The increasing capital outflow in September also played a part."

Wang predicted that the yuan could further weaken to about 6.8 per U.S. dollar by the end of this year as the dollar is expected to get stronger with the U.S. Federal Reserve expected raising of interest rates in December.

She ruled out the possibility that Chinese authorities would opt for a short-term move to further depreciate the yuan to boost exports after they fell 10% year-on-year last month, far worse than economists predicted.

Liu Jian, a researcher with the Bank of Communications financial research center, said market expectations of a weaker yuan continued to grow after the yuan's exchange rate against the U.S. dollar broke the psychological threshold of 6.7 after the National Day weeklong holiday. Depreciation expectations and capital outflows will affect each other and raise further pressure on the yuan, he said.

The spot trading rate closed at 6.7718 per dollar on Monday, down from 6.7558 the previous trading day. The off-shore trading rate of the yuan went above 6.8 at one point during Monday.

Contact Wu Gang (gangwu@caixin.com); editor Ken Howe (kennethhowe@caixin.com)