China signals weaker currency after U.S. Senate vote

(CNN) -- For the second consecutive day after a U.S. Senate vote aimed at penalizing China for undervaluing its currency, Beijing lowered the range at which the yuan could trade against the dollar.

The People's Bank of China (PBOC) first lowered the band at which the yuan is allowed to trade against the dollar just hours after the U.S. Senate approved a bill that pressures China to allow its currency to rise faster. The bill also faces a vote in the U.S. House of Representatives, where its approval faces an uphill battle.

The PBOC -- which sets daily limits on how much China's currency can appreciate or depreciate against the dollar -- again set Thursday trading guidelines slightly lower, although on both days currency traders continued to push the value of the yuan higher, suggesting investors don't believe this signals a weak yuan policy.

Yet the moves by the PBOC are against the wider trend of the yuan rising in value. China's currency has risen 3.25% in value against the dollar this year and more than 20% since Beijing started loosening its tight peg to the U.S. dollar in 2005. The PBOC set the midpoint trading value of the yuan at RMB6.3737 on Thursday, the highest level since September 27.

"The daily fixed rate can give some indication of what the PBOC is thinking in terms of policy, but often times it becomes clear only in retrospect," said Daniel Hui, senior currency strategist at HSBC. "Taking it back two weeks isn't exactly a strong message, but it could be a weak message."

China has warned that the measure could spark a trade war between the world's two largest economies."Should the proposed legislation be made into law, the result would be a trade war and that would be a lose-lose situation for both sides," said Vice Foreign Minister Cui Tiankai earlier this week.

"It would be detrimental to the development of economic ties and might have an adverse impact on bilateral relations."

Many critics in the U.S. believe China's "managed float" of the yuan keep it artificially low, allowing China to keep its labor and prices lower than American competitors. Others argue that a rise in the value of the yuan will ultimately hurt American consumers as they pay higher prices for products from China.

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