Yuan retreats from Monday's high

The Chinese yuan dropped back Tuesday from its new high Monday, after China announced its decision to let the currency trade in a wider range.

By early afternoon in Asia, the yuan was quoted at 6.82 to the U.S. dollar on spot markets. It had reached 6.7971 on Monday.

"They have backtracked a little. They want to show it's a bit more free-floating than before," said David Cohen, director of Asian economic forecasting for the consultancy Action Economics in Singapore.

The People's Bank of China made its announcement Saturday, ahead of the G20 summit in Toronto which begins June 26, moving to blunt accusations that its currency policies keep the yuan undervalued against the dollar, giving Chinese exporters an unfair advantage in overseas markets.

In place of the dollar peg, the central bank has restored its practice of setting the yuan's exchange rates against a basket of currencies, including the dollar.

After that system was set up in 2005, the yuan gained nearly 20 per cent against the dollar, until Beijing halted its rise two years ago to help protect its exporters from the global downturn.

"It didn't take long for investors to decide that China's decision to refloat the yuan served a specific political purpose but would not have any effect on any of the imbalances, accumulated over the last15 to20 years, which have given China such a lopsided trade surplus with the U.S.," Vancouver-based Citizens Bank said in a commentary.

With the yuan now valued against a basket of currencies that includes the euro, Citizens Bank said, "it's possible that as [the euro] continues to weaken [against the US dollar], the yuan could also weaken against the dollar."

Yi Xianrong, a prominent Chinese economist at the Chinese Academy of Social Sciences, warns that the yuan is unlikely to rise even at the modest pace it climbed at from 2005 to 2008.

"China has to keep the currency stable under the current circumstances and will certainly take any consequences of the yuan's appreciation very seriously," Yi said.