By Pete Sweeney SHANGHAI, June 8 (Reuters) - The yuan weakened against the dollar on Friday following surprise announcements that China will lower borrowing costs and liberalise interest rates to shore up slowing economic growth. The People's Bank of China (PBOC) cut policy rates for the first time since the global financial crisis on Thursday evening. The PBOC lowered benchmark rates by 25 basis points, bringing the official one-year borrowing rate to 6.31 percent and the one-year deposit rate to 3.25 percent. The central bank simultaneously raised the upward limit for deposit rates that banks offer and cut the lower limit for lending rates, narrowing the gap between deposit and lending rates to boost sluggish loan demand amid a sharp slowdown in the real economy. However, the direct impact of the announcements on the yuan spot rate has been moderate so far. The central bank set the midpoint fix at 6.3188, down slightly from Thursday's fix, but spot prices continued their custom of trading well below the midpoint, continuing to test the trading band, which was increased to 1 percent from 0.5 percent in April. The yuan started out at 6.3650 then weakened slowly through morning trading. It was last seen around 6.3710 per dollar, its lowest level of the week, around 0.8 percent away from the midpoint. "The influence of the lower interest rates on the yuan is restrained. Other market factors are more important," said a trader at a Shanghai bank. The dollar index, which the central bank appears to use as a referent when setting the midpoint, weakened against a basket of currencies following a speech by U.S. Federal Reserve Chairman Ben Bernanke that gave few hints as to whether the Fed is likely to provide more monetary support to the markets. Traders also said that buying sentiment toward the euro has been strengthening in recent days, putting downward pressure on the dollar. Other traders said that the central banks recent moves were as much a cause for concern as confidence; some suspect the surprise moves were made to offset upcoming unpleasant economic news. The yuan remains at a 10-year high against the euro, which will prove a challenge for China's export sector if sustained. Europe accounts for a fifth of Chinese exports. Yuan 1-year non-deliverable forwards (NDFs) did spike briefly in overnight trading following the rate cut announcement by Beijing. The spike caused the weighted moving average spread between NDFs and spot prices to shrink for the first time since February but the trend did not look sustainable by midday. NDF prices continue to imply a yuan depreciation this year of less than 1 percent. Offshore yuan (CNH) prices remained close the onshore yuan, as they have since early May. The new policy environment should produce a rise in the yuan's value, particularly offshore, wrote Dariusz Kowalczyk, economist at Credit Agricole CIB, in a research note on Thursday. (Editing by Eric Meijer) 2012-06-08 07:48:52
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