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China's yuan hits new 5-1/2 year low as central bank stays on the sidelines

Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, China, in this March 30, 2016 file picture. REUTERS/Kim Kyung-Hoon/Files

SHANGHAI (Reuters) - China's yuan touched a new 5-1/2 year low against the dollar for the second consecutive session on Monday on concerns that the central bank would tolerate a further weakening of the currency, as the bank appeared to have stood aside, traders said.

The yuan hit 6.6642 soon after the open due to a heavy bout of dollar buying in the market. That level was the weakest since December 2010.

Despite the yuan's continued slide, there were no signs of state banks' intervention on behalf of the central bank, with some traders saying "this is a tacit approval from the central bank to let the yuan slide further."

"The market remains calm as usual," said a trader from a Chinese commercial bank in Shanghai. "We all know that the yuan will weaken further. And the central bank got things under control."

Reuters reported on Thursday that the People's Bank of China (PBOC) would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016, policy sources said. That would equate to a depreciation of 4.5 percent for the year, the same as last year's record decline of 4.5 percent.

The PBOC set the midpoint rate at 6.6472 per dollar prior to the market open, 0.04 percent firmer than the previous fix 6.6496.

Spot yuan opened at 6.6550 per dollar and was changing hands at 6.6623 at midday, easing 0.07 percent from the previous close.

The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan's value based on the market's trade-weighted basket stood at 94.88 last week, the lowest on record.

The index was first published by CFETS in December 2015, setting the yuan's value at 100 at the end of 2014.

China is expected to report later this week June foreign exchange reserve data, which traders will be scouring for any suggestions of a resurgence in speculative capital outflows following the yuan's recent declines.

Forex reserves fell by $27.9 billion in May to $3.19 trillion, their lowest since December 2011, likely due to the effects of a stronger dollar and sporadic official intervention.

The U.S. Federal Reserve will keep a close eye on China's currency moves and its impact on the global economy and markets, Cleveland Fed President Loretta Mester said on Friday.

The offshore yuan was trading at 6.6745 per dollar, representing a discount of 0.2 percent to the onshore yuan. The offshore market is leading in forecasting the yuan's depreciation so far this year.

(Reporting by the Shanghai Newsroom; Editing by Kim Coghill)