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Yuan hits record high on China PBOC guidance

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1 Yuan hits record high on China PBOC guidance on Fri Feb 18, 2011 11:03 am


February 18, 2011, 12.01 pm (Singapore time)

Yuan hits record high on China PBOC guidance

SHANGHAI - The yuan hit a new trading high against the dollar on Friday after the central bank fixed the mid-point at a record for a second day, in a clear sign the government is willing to let the Chinese currency appreciate to help fight inflation.

Traders have long predicted the yuan will appreciate 5 to 6 per cent this year. China is expected to use the currency as part of its strategy to fight high consumer inflation, which was 4.9 per cent in January.

Spot yuan traded as high as 6.5778 against the dollar in early trade on Friday, up from Thursday's close of 6.5871 and having risen 3.78 per cent since its depegging from the dollar in June 2010. It touched an intraday low of 6.5875.

Before trade began, the People's Bank of China set the yuan's daily mid-point at 6.5781, up from Thursday's fixing of 6.5800.

The mid-point, from which the yuan can trade up or down a maximum 0.5 per cent in a given day, is the tool the central bank uses to express the government's intentions for the currency.

'Many of us believe the government has a sort of undeclared, tentative target for yuan movements in a month, a quarter and in a year,' said a trader at a North American bank in Shanghai.

'Although such plans are subject to change, they are typically based on careful study of prospects of China's economy and thus will not easily be altered.'

On top of inflation, China has been under pressure from the United States to let the yuan appreciate in recent years, although the government has repeatedly said it will control the pace of yuan appreciation and make decisions only in line with China's own economic conditions.

On Thursday, PBOC governor Zhou Xiaochuan reiterated that Beijing would decide the pace of yuan appreciation on its own and would not take into account pressure from other countries.

'External pressure has never been an important factor of consideration and we have never paid special attention to it,' Mr Zhou said in Paris on the sidelines of a G20 gathering of monetary policy chiefs.

In practice, however, the government has timed yuan appreciation mostly in relation to major political events, such as US elections and world leaders' summits, partly in recognition of the importance of the ties between the world's two biggest economies, dealers said.

While Beijing is partly worried a rapid yuan appreciation will hit exports and employment in the world's most populous nation, it has nevertheless allowed the currency to appreciate by about 26 per cent against the dollar since the landmark revaluation in July 2005.

Dollar/yuan offshore forwards rose slightly on Friday to imply less yuan appreciation after US Federal Reserve officials raised their forecasts for economic growth.

Benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4240 in early trade versus 6.4160 at Thursday's close. Their implied yuan appreciation in a year's time fell to 2.40 per cent from 2.53 per cent.

NDF-implied yuan appreciation has persistently lagged market expectations over the past couple of months as dealers said hedge funds, the main players in the forwards, cut back on exposure to Asian emerging markets in favour of dollar assets as the US economy recovers. -- REUTERS

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