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Yuan Forwards Climb as Fed Backs Low Rates, Supporting Growth

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Yuan Forwards Climb as Fed Backs Low Rates, Supporting Growth
April 29, 2010, 7:15 AM EDT

By Patricia Lui

April 29 (Bloomberg) -- Yuan forwards rose the most in four months after the Federal Reserve reiterated its pledge to keep interest rates low, supporting the outlook for China’s exports to the world’s biggest economy.

The 12-month contracts strengthened after the Fed said the labor market is improving but economic conditions still warrant exceptionally low levels of rates “for an extended period.” Forwards earlier touched a two-week low after Standard & Poor’s yesterday cut Spain’s credit rating, a day after it slashed Greece’s creditworthiness by three notches to junk and also lowered Portugal’s rank.

“There’s a bit of reprieve in global risk sentiment from the Fed’s comments overnight,” said Suan Teck Kin, an economist in Singapore at United Overseas Bank Ltd. “But this is likely to be short-lived as Europe’s sovereign crisis is not over. Yuan forwards reflect this skepticism as they see China is less likely to move on appreciation in this kind of environment.”

Twelve-month non-deliverable forwards rose 0.4 percent to 6.6085 per dollar as of 6:28 p.m. in Hong Kong, reflecting bets the currency will strengthen 3.2 percent from the spot rate of 6.8259, according to data compiled by Bloomberg. That was the biggest gain since Dec. 22.

China’s policy makers have indicated they are waiting for clearer signs of a sustained global rebound before deciding to allow gains in the yuan, which has been pegged at about 6.83 per dollar since July 2008. Evidence of a “very certain” recovery is needed before China can roll back stimulus measures adopted during the crisis, central bank Governor Zhou Xiaochuan said last month.

Government bonds were little changed. The yield on the 3.68 percent note due September 2018 was 3.22 percent, and the price of the security was at 103.36, according to the National Interbank Funding Center. A basis point is 0.01 percentage point.

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