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Yuan hits record on dollar weakness, up 1 pc so far this year

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CHINA IS YES NO YES NO YES NO...wonder who told them to back off?

21 Apr, 2011, 10.34AM IST,Reuters

Yuan hits record on dollar weakness, up 1 pc so far this year

SHANGHAI: The yuan hit another record high against the dollar on Thursday, climbing more than 1 percent for the first time so far this year, as the People's Bank of China hastened to let the currency appreciate while the U.S. Dollar Index tumbled to a three-year low.

The dollar's slide against a basket of major currencies supported a broad rally in commodities, pushing Brent crude above $124 a barrel while spot gold hit a record high above $1,500 an ounce in early Asian trade.

China, the world's fastest growing market for staple goods ranging from oil to non-ferrous metals, has decried the impact of imported inflation on its corporate world.

Top banking regulator, Liu Mingkang, in published remarks on Thursday, blamed the ultra-loose monetary policies in developed countries for global inflation.

"Here we see some unhappiness on the Chinese side on what it thinks, that Western nations are driving up global commodity prices and inflation," said a senior trader at a European bank in Shanghai.

"But happy or not, faster yuan rises are now a reluctant choice for China to help cope with the inflationary reality."

Spot yuan was trading at 6.5200 on the dollar at midday, up from Wednesday's close of 6.5255 and has now appreciated 4.69 percent since it was depegged in June 2010, and 1.06 percent so far this year.

It touched an all-time high of 6.5186 in early trade, toppling the former record of 6.5244 hit on Tuesday.

Before trading began, the PBOC fixed the yuan's mid-point at an all-time high of 6.5228, stronger than Wednesday's historical high of 6.5294. The fixing is used by the PBOC to express the government's intentions for the currency.

ANOTHER REVALUATION UNLIKELY Xia Bin, an academic adviser to the PBOC, said earlier this week that he could not rule out another one-off revaluation for the yuan, although the government has repeatedly said it would not consider another one-off adjustment in the yuan's value after a 2.1 percent landmark revaluation in July 2005.

His comments have sparked some speculation overseas that the government may change its mind over how to manage the rises of the currency's value, but few traders on the Chinese market believed another revaluation will come any time soon.

China's State Council, the cabinet, has the final say on yuan revaluation, but Premier Wen Jiabao has repeatedly said this year that the yuan's appreciation will be gradual. There will not be a quick change of policy, traders expected.

Also spot yuan can trade up or down 0.5 percent against the dollar in a day in line with Chinese regulations. The PBOC can easily achieve a 2 or 3 percent yuan appreciation by setting the yuan's mid-point higher each day without contradicting the government's stance of gradualism, they said.

As an academic adviser to the PBOC, Xia has no decision-making powers and his comments do not reflect the government's stance.

Still, traders said it may be more to China's benefit to let the yuan appreciate faster to take advantage of the higher value of the currency to fight inflation while the PBOC could still pull back the currency quickly if market conditions change.

If the yuan rises too slowly, lagging conditions in the global market, China's economy may not be cushioned in time from the effects of imported inflation, traders said, noting that it was possible that policy makers had reached a common understanding on the necessity for quicker appreciation.

Offshore, one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3480 at midday, down from 6.3560 at Wednesday's close. Their implied yuan appreciation in a year's time rose to 2.75 percent from 2.62 percent.

NDFs have lagged in implying yuan rises for 2011, compared with widespread expectations of a 5 to 6 percent rise for the year, partly due to capital outflows to Hong Kong's expanding offshore yuan business . A window remains open to bet on more yuan strength in the NDFs.

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