China's yuan touched a nearly four-week low on Friday as the central bank set another soft fixing of its official midpoint in response to weakness in the yen and other Asian currencies.
Traders say corporate yuan demand is strong but the central bank is using its daily midpoint to restrain appreciation and blunt the impact on Chinese exports from recent devaluation by Asian neighbours.
The yen plumbed fresh multi-year lows against its G3 peers on Friday, having posted its biggest monthly decline in 12 years versus the euro as the market positioned for more aggressive easing from the Bank of Japan.
The yuan hit an intra-day low of 6.2296 per dollar in late morning but had recovered to 6.2255 at midday, 0.11 percent softer than Thursday's close.
The dollar index has fallen this week, driven by strength in the euro. The People's Bank of China (PBOC) has traditionally set stronger yuan fixings in response to a decline in the index.
But traders say the PBOC is now focused on the yen and other Asian currencies such as the Korean won and Singapore dollar, which carry little weight in the dollar index. The won also touched a three-month low this week.
In addition to the impact of the midpoint, traders also suspect that the PBOC continues to conduct small-scale market interventions in the form of dollar purchases.
A trader at a city commercial bank in Shanghai estimated the size of PBOC's daily interventions at around $1 billion, though he cautioned this was a rough estimate. That compares to an average of about $17 billion in daily trading volume over the last two weeks.
Traders generally expect the yuan to hold steady through the Lunar New Year holiday. China's interbank FX market will be closed from Feb. 9 to 15.
Traders say appreciation pressure from strong corporate demand is likely to continue, as many companies still have long dollar positions to unload. But whether authorities allow that pressure to express itself depends on whether the so-called "currency war" ramps up.