China's yuan weakened against the dollar on Friday, but looked set for its second straight week of gains in response to stronger midpoints set by the central bank and global dollar weakness.
Traders say big state-owned banks were seen selling dollars in the market to support the yuan, as they have been doing frequently since the currency fell below the psychologically important 6.7 to the dollar level on July 18.
The People's Bank of China set the midpoint rate at 6.6511 per dollar prior to market open, firmer than the previous fix of 6.6597.
In the spot market, the yuan opened at 6.6554 per dollar and was changing hands at 6.6510 at midday, 60 pips away from the previous late session close but sticking to the midpoint. The spot rate is allowed to trade with a range 2 per cent above or below the official fixing on any given day.
For the week, it looked set to gain about 0.4 per cent, its best weekly performance in four months.
"Demand to buy dollars is strong, but big state-owned banks are selling dollars,” said a trader at a Chinese bank in Shanghai.
"The PBOC encourages two-way volatility by guiding the yuan higher for a period and then lets it weaken. So we are all seeking clues at which level the yuan will start to fall again.”
Many economists believe the currency could be allowed to slip to the 6.8-7.0 level by the end of the year.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.96, firmer than the previous day's 95.81.
The global dollar index fell to 96.329 from the previous close of 96.739.
The offshore yuan was trading -0.12 percent away from the onshore spot at 6.659 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.803, -2.23 percent away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.