Yuan slips against dollar as pact with Japan set to start

The value of the monetary unit of China dropped against the world's reserve currency on Tuesday, pushed down by design of the central bank amid worries about the shared currency of the European Union weakening with the stress of the sovereign debt crisis harming Spain's financial institutions, according to Dow Jones Newswires.

The People's Bank of China set the central parity rate between the U.S. dollar and the Chinese yuan at 6.3262 following concerns about the integrity of the banking sector of Spain.

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Those concerns were stronger than those pertaining to surveys indicating debt-hobbled Greece is leaning toward political parties that favorably view a bailout when the nation's voters return to the polls next month.

Some traders told the news source that the value of the Chinese currency is prone to continue dropping as the sovereign debt crisis continues thrashing about in the euro zone. Since the beginning of this year, the yuan has lost 0.9 percent of its value against the U.S. dollar.

The 6.3500 resistance is very close now and the pair is very likely to rise above it in the following days given the uncertainties in the euro zone, a Shanghai-based trader associated with a local bank told the news source.

Also impacting the value of the Chinese yuan is news stating the Asian nation and Japan are set to trade currencies directly beginning next month, according to Reuters.

To ensue in Tokyo and Shanghai beginning this Friday, the trade of currency between the countries is forecast to shore up financial and trade ties between the two largest economies in Asia. That of China is larger than that of Japan.

The move also is projected to raise the profile of the yuan on a global scale.

By instituting swaps, the U.S. dollar no longer is required to establish an exchange rate. The move harkens back to a late 2011 pact between the nations as well.

In December of last year, China and Japan also agreed that the Pacific Rim nation would acquire debt belonging to the government of China. They also agreed to advance plans to establish a free trade pact three ways, between China, Japan and South Korea.

This is part of China's broader strategy to reduce dependence on the dollar. The yen has been chosen because of large trade flows between the two countries, senior economist and strategist Dariusz Kowalczyk with Credit Agricole CIB in Hong Kong told Reuters. Volumes of currency trading on shore are small, but this could lead to an expansion of trading with other currencies. It would be easier for China to expand into other Asian currencies.

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Jan Azumi, finance minister of Japan, announced the decision in the Japanese capital on Tuesday following a meeting of the nation's cabinet.

The finance minister said the new decision will deliver cost benefits.

The central bank of the Asian nation cited mutual trade benefits while also noting China has been angling to use its monetary unit for trade and financial transactions within settlement currencies.

Developing the direct yuan/yen trading will help form the direct yuan/yen exchange rate and reduce the trading cost for entities and promote the use of the yuan and yen in bilateral trade and investment as well as help strengthen financial cooperation between the two countries, the Peoples Bank of China indicated in a statement.

China Daily reports the move marks the first time that China will permit a major currency other than the U.S. dollar to trade directly with the yuan.

Once Friday arrives, the nations will cease using the U.S. dollar to establish exchange rates.