The yuan fell sharply against the US dollar in the Hong Kong offshore market on Friday, extending Thursday's slide - another sign that global investors are scrambling to lock in their profit and exit emerging markets in the face of volatility in global markets.

Friday afternoon, the yuan traded in Hong Kong was at 6.50 per US dollar, a 0.15 yuan discount to the onshore rate - its steepest since the Hong Kong market was launched in June 2010.

Typically, the yuan in the offshore market trades at a premium to the onshore rate as the currency is freely convertible in Hong Kong and investors have purchased it aggressively, betting on further gains.

With Asian currencies coming under severe selling pressure this week amid a worsening euro zone debt crisis and on the heels of the US Federal Reserve painting a gloomy economic outlook, traders said some hedge funds and banks had been liquidating long yuan positions.

Liquidity in the interbank markets also dropped sharply and price swings have magnified.

One senior trader at a European bank in Hong Kong said only about $500 million has been traded so far, lower than Thursday and much lower than the daily average volume of more than $1.5 billion.

Mark Wan, chief analyst at Hang Seng Bank Investment, told China Daily that most emerging markets' local currencies have been depreciating against the US dollar recently as the pessimistic economic outlook in the US, Europe and Japan has driven investors to exit from these markets.

"Investors tend to hold money in a gloomy economy. Hot money is exiting from emerging markets, including China, as importers including the US and the Europe are dismal in economic growth and the outlook," said Wan.

Benchmark one-year offshore dollar/yuan forwards jumped to 6.4098 as of 7:01pm on Friday from 6.3773 on Thursday, implying further yuan depreciation in the next 12 months.

The US dollar strengthening against the yuan is likely to continue throughout the rest of the year, until the US government initiates another round of quantitative easing next year, Wan predicted.

Reuters contributed to this story.

litao@chinadailyhk.com

China Daily

(HK Edition 09/24/2011 page2)