The Chinese Yuan fell to a four-month low against the Dollar on Friday, surpassing a key threshold and leading state-owned banks to intervene to defend the currency.

The onshore Yuan fell to the weaker side of the 7.2 per Dollar level in the spot market to a low of 7.24, the weakest since mid-November last year.

According to market sources, state banks intervened to purchase the Yuan for Dollars, Reuters reports. At the close, the Yuan was trading at 7.2275, 281 pips weaker than the previous close.

The Yuan has declined around 2% in three months and has experienced mounting pressure from increasing market demands for additional monetary easing measures to support the second-largest global economy, as well as a depreciating Japanese yen.

According to Carlos Casanova, a senior economist specialising in Asia at UBP, the strengthening of the Dollar and significant depreciation of the Yen and certain Asian currencies subsequent to the Bank of Japan ending its negative interest rate policy, have exerted downward pressure on the Yuan.

"The market seems to have interpreted Asian currencies should depreciate further against the US Dollar until the D-day of interest rate cuts by the Fed," he said.

Ahead of the market opening, the People's Bank of China (PBOC) set the midpoint rate, with the Yuan allowed to trade within a 2% range, at 7.1004 per Dollar, 62 pips weaker than the prior fix of 7.0942.

For several months, the Chinese central bank has been setting the rate at levels stronger than market forecasts, according to traders.

On Friday, the midpoint was 1,143 pips stronger compared to a Reuters estimate of 7.2147, marking the largest difference since November.

Furthermore, the offshore Yuan weakened to 7.2712 at one point in late trade in Asia, the weakest since 14th November last year. 

The abrupt decline in the Yuan also had a negative impact on stock markets, as evidenced by the benchmark Shanghai stock index which opened down by 1%.

If there are indications China is permitting the Yuan to depreciate from 7.2 to 7.3, "it would definitely make it more difficult for this equity rally to continue because a lot of people would try to diversify into US Dollar exposure," Casanova added.