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Yuan ends down vs dollar as China FX reserves fall

SHANGHAI, Dec 22 (Reuters) - China’s yuan ended slightly lower against the dollar on Monday and traded in a range that was weaker than the Chinese central bank’s daily mid-point, as the country’s foreign exchange reserves fell in October for the first time since 2003.

The yuan was also under pressure as the Chinese market anticipated a global dollar rally after the U.S. Dollar Index .DXY appreciated 1.72 percent last Friday.

The index, which staged a one-month correction in the wake of a 20 percent-plus surge from mid-July to mid-November, trimmed some of Friday’s gains in early European trade on Monday.

“Banks here largely believe the fundamentals that support a strong dollar have not changed much,” said a dealer at a major European bank in Shanghai, citing factors including the continued rumbling of the global financial crisis.

“That belief is keeping the yuan trading steadily weaker than the mid-point today, although the market doesn’t expect the yuan to see extended appreciation or depreciation in the near term.”

Before trade began on Monday, the central bank set the yuan's mid-point against the dollar CNY=SAEC at 6.8377, down from Friday's reference rate of 6.8357, reflecting but lagging the dollar's global rise on Friday.

Spot yuan CNY=CFXS closed at 6.8510 after trading in a range of 6.8398 to 6.8525, weaker than the mid-point and down from Friday's close of 6.8465.

China’s foreign exchange reserves, the world’s largest, shrank in October to less than $1.89 trillion, their first monthly fall since December 2003, a source familiar with the situation said on Monday.

The reserves stood at $1.906 trillion at the end of September, the last date for which official figures have been reported, meaning they fell by at least $16 billion during October. [ID:nPEK263180]

Cai Qiusheng, an official with the State Administration of Foreign Exchange (SAFE), had acknowledged in a speech on Saturday that the reserves had fallen from their level above $1.9 trillion, but gave no further details on the extent or timing of the fall. [ID:nPEK291549]

STABLE STRATEGY

Qu Hongbin, chief China economist with HSBC in Hong Kong, commented that declining foreign exchange reserves could heighten expectations of yuan depreciation.

“Indeed, hot money inflows are already yesterday’s story,” Qu said in a research note on Monday.

“And there are also some tentative signs of small outflows. Yet it is still hard to confirm if the reversing of massive speculative inflows has started, particularly given that renminbi (yuan) interest rates are still higher than dollar rates.”

The central bank has used its mid-point system and indirect intervention to keep the yuan stable over most of the past five months, causing the currency’s daily rises and falls to lag far behind global dollar movements.

With worries lingering over possible capital outflows as Chinese asset prices fall, the central bank is expected to continue the strategy barring extraordinary dollar movements, dealers and analysts said.

Several Chinese ministries said over the weekend that they would pursue foreign investors who flee the country to escape failed business investments and debt.

China will ask foreign governments to help investigate and extradite fugitives, especially in cases involving large sums of money, the official Xinhua news agency said. [ID:nSHA264459]

Offshore, one-year dollar/yuan non-deliverable forwards CNY1YNDFOR= rose to 7.0933 bid in late trade on Monday against their previous close of 7.0300.

Their latest level implied yuan depreciation over the next 12 months from the day’s spot mid-point of 3.60 percent, up from 2.76 percent implied at Friday’s finish, with overseas investors also seen betting on a global dollar rebound, dealers said. (Editing by Edmund Klamann)

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