Yuan edges up versus dollar, market wary of currency war risk

SHANGHAI Wed Feb 20, 2013 5:12am GMT

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SHANGHAI (Reuters) - The yuan rose slightly on Wednesday after the People's Bank of China (PBOC) set its daily midpoint slightly higher to reflect a fall in the dollar in global markets, traders said.

The market is increasingly wary of the growing risk of Asian countries devaluing their currencies to protect exports, but ignored a decline in China's foreign direct investment (FDI) inflows, traders said.

Spot yuan was trading at 6.2423 per dollar near midday, up 0.03 percent from 6.2443 at Tuesday's close.

Volume was heavy at $13.52 billion on Wednesday morning, up from Tuesday morning's $7 billion, with traders reporting some clients selling off dollars to take advantage of the yuan's relatively solid level on Wednesday.

Before trading began, the PBOC set the yuan's midpoint at 6.2804, 0.3 percent stronger than Tuesday's midpoint of 6.2821 and inversely tracking the dollar index, which fell slightly overnight.

In the latest sign of worries that Asian countries may push down the value of their currencies, as Japan has done, the New Zealand central bank said on Wednesday that the New Zealand dollar was significantly overvalued compared with its economic fundamentals.

Reserve Bank of New Zealand Governor Graeme Wheeler said part of the currency's strength reflected global imbalances, knocking the currency down by nearly half a cent.

Caution has increased since the weekend, when a statement by G20 policymakers did not single out Japan for its actions to devalue the yen.

The market largely interpreted the statement as de facto acceptance of Japan's recent expansionary monetary policies, which have contributed to a weaker yen.

In another related development, China's FDI inflows in January fell 7.3 percent from a year earlier, extending 2012's series of consecutive year-on-year declines that highlights still sluggish global economic conditions.

The Commerce Ministry said on Wednesday that China drew $9.27 billion in FDI in January, down from December's $11.7 billion. Investment inflows from key Asian economies and the U.S. were down in the latest period.

(Editing by Jacqueline Wong)

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