China opens door to weaker yuan

New York - China's yuan continued to tumble on Friday after the government opened the door to further weakness, signalling it would begin measuring it against a multi-currency basket instead of the dollar.

Other major currency pairings were little changed though as markets prepared for next week's Federal Reserve meeting, in which the US central bank is all but certain to undertake the first rate hike in nearly a decade.

The dollar finished the day slightly lower at $1.0996 against the euro and at ¥120.86.

The People's Bank of China announced it would move away from its peg of the yuan to the US dollar and instead measure it against a basket of currencies of its major trading partners to better reflect market realities.

But the Chinese central bank did not give details on how the basket of currencies would be weighted or when the changes would take effect.

The government sets the rate daily on the yuan, also known as the renminbi, which is currently trading within a two percent margin against the dollar.

"The bilateral renminbi-US dollar exchange rate is not considered a good indicator of the international parity of tradable goods," the bank said in a note on its website.

On Friday, the yuan closed at 6.4552 per dollar, its weakest level since July 2011, down from 6.4386 per dollar on Thursday.

"Following the shock devaluation back in August, China's interventions are continuing to cause FX market instability," said Nawaz Ali, an analyst at Western Union Business Solutions, in a market note.

"China appears to be intervening to weaken its renminbi more quickly ahead of next week's US interest rate decision.... US dollar strength in 2015 is proving to be a major drag on China," Ali said.

Ali said the dollar's weakness Friday appeared to be linked to customary portfolio shuffling at the end of the year.

Analysts meanwhile remained unsure of how the long-anticipated Fed rate hike, expected to be decided Wednesday, will impact markets over the short run.

But most said over time the dollar should strengthen.

"Even a gradual pace of tightening should see the divergence between US and global monetary policy widen further, supporting the greenback against the G10 and emerging currencies over the medium term," said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities.