SHANGHAI, June 24 (Reuters) - China's yuan weakened to a seven-month low against the dollar on Monday and was closing in on the official policy band limit, pressured by broad strength in the dollar and the drop in the yen.
The currency seemed set for a sixth straight monthly drop in June, and has stayed within a whisker of the weak side of its daily official trading band over the past week as capital outflows into higher yielding dollars and speculation the central bank is allowing it to depreciate slowly have weighed on it.
Spot yuan eased to a trough of 7.2624 per dollar, the weakest level since November and just one pip away from the weak end of the band in which the People's Bank of China guides it. It last traded at 7.2618 per dollar as of 0910 GMT.
It had, however, stayed within a very narrow range as traders waited for key economic data at home and other U.S. indicators that will help shape the U.S.Federal Reserve's policy expectations.
Trading was also subdued as Asian markets watched the yen creep closer to 34-year lows that prompted Japanese yen-buying intervention in late April.
The Chinese yuan is 2.2% weaker this year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, weak consumption and falling yields drive capital flows out of yuan, and foreign investors stay away from its sickly stock market.
The yuan is up more than 10% on the yen so far this year, a major reason analysts suspect Beijing is massaging its own currency lower over time.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1201 per dollar, its weakest level since November, 1,446 pips firmer than a Reuters' estimate.
The central bank has been gradually lowering its daily yuan official guidance, well within market projections but with a bias suggesting it is allowing some weakness, traders and analysts said.
Such yuan midpoint fixings "reinforced our view that the PBOC is pursuing a very measured pace of yuan depreciation and with the intent of still maintaining the yuan broadly stable," said Christopher Wong, a forex strategist at OCBC Bank.
Based on Monday's official guidance, the yuan is allowed to weaken as much as 7.2625.
The gradual weakness in the yuan against the dollar has partly helped resolve the tension between the PBOC's apparent strong currency policy and its generally loose monetary settings, said Alvin Tan, Asia FX strategist at RBC Capital Markets.
"Yet, Beijing retains a deep anxiety about financial instability triggered by a weakening currency, with the 2015-2016 episode still fresh in mind," Tan said, referring to China's one-off sharp yuan depreciation in August 2015 that roiled the global financial markets.
Separately, markets will pay close attention to economic data from both home and abroad this week for a clearer picture of the currency outlook.
They will focus on the U.S. personal consumption expenditures price index, which serves as the Fed's favored gauge of inflation - due on Friday, along with China's May industrial profits on Thursday and June manufacturing survey due on Sunday. (Reporting by Shanghai Newsroom; Editing by Sam Holmes and Rashmi Aich)
