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Yuan overtakes euro as 2nd most used currency in trade finance

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The yuan has overtaken the euro as the second most used currency in international trade finance, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

The share of the Chinese currency's usage in trade finance, such as Letters of Credit and Collections, grew to 8.7 percent in October, from 1.9 percent in January 2012, data from the transaction services organization showed.

It now ranks behind the U.S. dollar, which remains the leading currency with a share of 81.1 percent.

The euro's share, meanwhile, dropped to 6.6 percent in October, from 7.9 in January 2012, and is now in third place.

(Read more: Yuan now one of world's most tradable currencies)

The top five countries using the renminbi (RMB) for trade finance in October were China, Hong Kong, Singapore, Germany and Australia.

"The RMB is clearly a top currency for trade finance globally and even more so in Asia, as shown by...the pace at which China's exporters and importers and their counterparts use the RMB for Letters of Credit," said Franck de Praetere, head of payments and trade markets, Asia Pacific, at SWIFT.

The yuan's use in international trade is set to continue growing in the coming years, say market watchers.

(Read more: Yuan as global currency? Many firms don't see benefits)

According to a poll by HSBC conducted earlier this year, a quarter of 700 global businesses surveyed said they expect to start using the currency in trade settlements within the next five years.

"Businesses trading with China that fail to seize the opportunity of using the yuan may be losing out to their competitors - it's not a level playing field," the bank said.

The bank expects the yuan to account for 30 percent of China's external trade settlement by 2015, up from 12 percent at the end of 2012, ultimately paving the way for full yuan convertibility.

(Read more: Yuan moves one step closer to global currency status)

—By CNBC's Ansuya Harjani; Follow her on Twitter: @Ansuya_H