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Yuan weakens as traders sense rate balance

Tuesday, 30 Oct 2012 | 5:06 AM ET

* China c.bank weakens yuan midpoint

* Ends three straight days of stronger fixes

* Yuan falls back after slightly stronger open

* Demand stable as rate nears balance, say traders

SHANGHAI, Oct 30 (Reuters) - China's yuan weakened slightly in morning trade on Tuesday, and traders said it may have reached a natural balance after last week's rush for the currency.

The People's Bank of China set its midpoint at 6.3028 per dollar, weaker that Monday's fix of 6.2992. That broke a sequence of three consecutive days when the central bank has strengthened the yuan's midpoint.

The stronger fixings were apparently aimed at allowing the currency some additional room to strengthen without bumping up against its strong-side limit. But the weaker midpoint on Tuesday suggests that the central bank now sees decreased risk of the yuan hitting its upper limit.

The yuan opened at 6.2430, slightly stronger than Monday's close of 6.2436, before weakening to 6.2457 per dollar around midday.

Traders suggested that looser demand for the yuan was due to the rate approaching a natural balance after rising sharply since a year-low at the end of July.

That meant that in morning trade the rate never looked likely to trouble the strong side limit. The yuan hit that limit on Thursday and Friday and came within about 0.1 percent on Monday.

The exchange rate can rise or fall 1 percent from the mid-point set by the central bank each day.

Also pressuring the yuan on Monday was a rise in the dollar in global markets. The dollar index rose overnight China time, with some analysts saying that the threat of massive storm Sandy, currently battering the U.S. East Coast, supported a mild strengthening in the dollar as investors looked for a safe haven.

The yuan's value against the dollar tends to track the performance of the dollar against other global currencies.

(Reporting by Shanghai newsroom; editing by Kim Coghill)