Yuan weakens further to new five-year low

The central parity rate of the Chinese currency renminbi (yuan) weakened further by six basis points on Tuesday to 6.5790 against the US dollar, the lowest level since February 2011, according to the China Foreign Exchange Trading System.

The fall followed Monday's drop of 294 basis points, which dragged the central parity rate of the yuan to its weakest point in more than five years, Xinhua news agency reported.

The tumble came after US Federal Reserve Chair Janet Yellen said at the Harvard University on Friday that an interest rate hike in the next few months would probably be appropriate if economic data improves.

Her comments boosted the US dollar against other major currencies.

Despite the fluctuations, there remains only limited concern over the yuan's depreciation pressure among market observers.

"China has allowed greater flexibility in the renminbi exchange rate while maintaining its stability," according to a report issued by investment bank China International Capital Corp. (CICC) on Monday.

As the dollar moves, the renminbi may show more fluctuations in the second and third quarter, but a large one-off devaluation is unlikely, CICC forecast.

The yuan is undergoing a lengthy transition from a highly managed regime to more of a floating one, according to a HSBC report, which predicted that China would remain committed to foreign exchange reforms.

Since August 11, 2015, when China's central bank decided to adjust the "central parity system" to make it better reflect market development in the exchange rate of the Chinese yuan against the US dollar, the renminbi has experienced several rounds of volatile adjustments.

After the rate fixing reform, daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens are required to be based on the closing rate of the inter-bank foreign exchange rate market on the previous day, supply and demand in the market, and price movement of major currencies.

On the day following the policy change, the central parity rate of the yuan weakened sharply to 6.2298 against the US dollar, down nearly two percent to the lowest point since April 2013.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by two percent from the central parity rate each trading day.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.

--IANS

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