SHANGHAI - The yuan rebounded strongly against the dollar in the offshore forwards markets on Monday after the European Union and the IMF agreed on a $1 trillion emergency rescue plan to protect indebted eurozone countries.

The deal sparked a 1 percent drop in the dollar index against a basket of currencies while the euro rallied.

In addition, China announced a $1.7 billion trade surplus for April, defying expectations for its second consecutive monthly deficit.

But traders said that may not be enough to ease China's recently heightened caution over depegging the yuan from the dollar, after Europe's debt crisis fuelled worries about the export outlook and the potential for stepped-up capital inflows.

"China may still want to monitor such a complicated problem," said a trader at a European bank in Shanghai.

One-year dollar/yuan NDFs fell to 6.675, pricing in 2.28 percent appreciation of the yuan within a year, compared with 6.711 at Friday's close, or a 1.73 percent gain, and 6.77 at Friday's high, for a rise of only 0.84 percent.

The yuan retained its long-standing steady tone in the spot market, trading at 6.826 per dollar at midday, little changed from Friday's close of 6.8257, after the Chinese central bank fixed the yuan's daily mid-point, or reference rate, at 6.8269 per dollar on Monday, marginally firmer than the previous session's 6.8271.

The United States and China are due to hold another round of Strategic and Economic Dialogue in Beijing on May 24-25 and a US treasury report on currency practices of trading partners, which was delayed from April 15, is still expected in June.

Traders believe China may prefer widening the yuan's daily trading band as a gesture to the United States while moving more cautiously on depegging the yuan from the dollar.

The People's Bank of China now lets the yuan rise or fall up to 0.5 percent each day against the dollar from a midpoint it sets each morning.

One-year onshore dollar/yuan forwards dropped to 6.7088 from Friday's close of 6.7322, although their premium over the offshore forwards widened to 338 pips from 212 pips on Friday.

The spread had briefly inverted in Friday trade for the first time in more than one year, during the crisis that followed the Lehman Brothers bankruptcy.

Reuters

(China Daily 05/11/2010 page14)