By Gabriel Wildau
SHANGHAI, Dec 12 (Reuters) - China's yuan touched its weakest level in nearly eight weeks on Wednesday, and traders said forceful central bank intervention has restored dollar demand to the market and broken a long deadlock that had decimated trading volumes.
'Things won't go back to the way they were. The whole market knows that the central bank has bought a lot (of dollars),' said a trader at a commercial bank in Shanghai.
'Now the market is lacking in dollars. They've all been snapped up by the central bank. So a lot of people will start to store up dollars,' he added.
Spot yuan closed at 6.2518 versus the dollar on Wednesday, softer than its 6.2460 close on Tuesday. Volume was strong at $15.1 billion.
The People's Bank of China (PBOC) has intervened sporadically in recent weeks when it appeared trading would otherwise grind to a halt.
It launched another such intervention on Monday, buying dollars aggressively amid an absence of other dollar bidders. But unlike previous efforts, Monday's action continued through all of Tuesday and probably involved far heavier dollar purchases, traders said.
That caused spot yuan to touch an seven-week intraday low on Tuesday and sink further Wednesday to touch its lowest level since Oct. 19.
The PBOC set its midpoint at 6.2883 on Wednesday, mildly stronger than Tuesday's fix of 6.2906. That implied a top-end limit of 6.2254. The bank allows the exchange rate to rise or fall by no more than 1 percent from the midpoint it sets each morning.
Transactions have dwindled over the last six weeks amid a standoff between the central bank and market players who repeatedly pushed the yuan to the top-end of its daily trading band.
Traders say now that the deadlock is broken, corporates which had been delaying dollar purchases are also returning to the market. Many firms have dollar-denominated accounts payable due at year end, including China's state energy firms, who use dollars to pay for crude oil imports.
In a gauge of how previously entrenched expectations have been dislodged, one-year onshore swap points plummeted from 1,380 on Monday to trade at four-month lows of 800 on Wednesday afternoon. Some bids were as low as 425 points.
A decline in swap points indicates that dollar interest rates have risen relative to yuan interest rates, a sign that dollars have grown scarcer.
The PBOC's intervention this week has apparently occurred via state banks, which were seen buying aggressively on Monday afternoon and Tuesday.
Traders typically interpret such purchases as evidence that the central bank is acting through state banks to inject liquidity, though actual trades involving the central bank are invisible to the rest of the market.
(Editing by Sanjeev Miglani & Kim Coghill) Keywords: MARKETS CHINA YUAN CLOSE/
(Gabriel.Wildau@thomsonreuters.com)(+86 21 6104-1783)(Reuters Messaging: firstname.lastname@example.org)
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