SHANGHAI - China’s yuan dipped to a six-year low against the dollar on Monday, breaching a key psychological threshold after a week-long national holiday that saw offshore-traded yuan slump to nine-month lows.

The fall in the value of the Chinese currency comes after the central bank announced late last week that its foreign exchange reserves dropped for a third month in September, by more than expected, suggesting fresh capital outflows from the world’s second-largest economy.

Pressure has also risen on the yuan as the US dollar has strengthened in global markets, most recently on the back of strong labor market data that supports a possible US interest rate hike later this year.

On Monday morning, the yuan spot rate fell below 6.7, a psychological barrier in the market, for the first time since July. It traded as low as 6.7051, its lowest rate since September 2010, before paring the day’s losses to be around 6.7020.

The People’s Bank of China put the midpoint on Monday at 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 per cent weaker than the setting on September 30, before the October 1-9 National Day holiday.

The currency is allowed to trade in a band of 2 per cent on either side of the midpoint, which is set each day.

TOUGH TO PREDICT

One trader at a European bank in Shanghai said he thought the yuan could potentially continue to depreciate against the dollar unless the central bank took steps to stop the slide.

"It’s hard to predict how the yuan will move today, and so far we haven’t seen any central bank actions. The yuan could soon breach the 6.75 level if the central bank does not show up at all," said the trader, who declined to be identified because he was not authorized to speak publicly.

A trader at a Chinese bank said the central bank may have loosened its grip at the 6.7 per dollar level after the yuan’s official inclusion into the International Monetary Fund’s reserve basket, known as Special Drawing Rights (SDR), on October1.

"We will have to see what the next threshold is," the trader added.

On Friday, the offshore yuan slumped to its lowest rate against the dollar since January 7. Offshore yuan mostly trades in Hong Kong and is not bound by the Chinese central bank’s tight trading restrictions.

In the weeks before onshore markets closed for China’s long holiday, the spot rate flirted with 6.7. The last close was at 6.6745.

The yuan is expected to fall another 3 per cent by next September, according to a Reuters poll of more than 70 foreign exchange strategists issued on Thursday. - REUTERS