Yuan hits 4-1/2-year low as China aims to loosen peg to dollar

China’s yuan closed at its weakest level since July 2011 on Monday, after the central bank said it had begun publishing a yuan exchange rate weighted against a basket of currencies, a move that will eventually loosen the currency’s link to the greenback.

The China Foreign Exchange Trade System (CFETS) announced after the market close on Friday that it had launched a new trade-weighted yuan exchange rate index ─ a move that suggests Beijing will let the yuan weaken further against the dollar.

The announcement by CFETS, a unit of the central bank, shows Beijing’s intention to gradually make the yuan an independent currency, traders said.

“The weightings clearly show that China intends to get rid of the yuan’s reliance on the dollar over time,” said Huang Yi, head of forex trading at China Guangfa Bank in Shanghai.

“As such, the yuan’s movements will be more market-oriented and rely on economic and financial fundamentals in the long run.”

The yuan is set to depreciate against the dollar in the near term due to a slowdown in the world’s second-largest economy and a strengthening dollar as the United States (US) Federal Reserve prepares to raise interest rates this week, traders said.