Economy

Yuan strengthens against dollar

By Lu Jianxin and Jason Subler (China Daily)
Updated: 2011-02-18 13:18

SHANGHAI - The yuan rose against the dollar on Thursday morning after the People's Bank of China set a record high mid-point while its value versus a trade-weighted basket remained at a standstill.

Before trading began, the People's Bank of China, the central bank, fixed the yuan's daily mid-point at 6.5800 to the dollar, up from Wednesday's 6.5855, the highest since the country's major exchange rate reform in 2005.

While the yuan is showing increasing signs of steady appreciation against the dollar, its value versus a trade-weighted basket remained weak in January, the latest data issued by the Bank for International Settlements (BIS) showed.

The BIS data issued late on Wednesday showed that the yuan's real effective exchange rate (EER) against a basket of trade-weighted currencies was almost unchanged at a reading of 118.13 in January down by 1.52 percent compared with December.

Major currencies in the basket include the dollar, euro, yen and won. They account for about 64 percent of the total weight.

Analysts said the recent strengthening of the euro and the pound in the international markets is part of the reason for the yuan's slip against the basket of currencies calculated by the BIS.

"Market supply and demand is capping the yuan's rise, implying corporate clients believe the yuan's exchange rate above 6.85 is good enough to buy dollars for now," said a senior dealer at a Chinese commercial bank in Shenzhen.

"But the currency should have room to climb further at least in the near-term."

Spot yuan was trading at 6.5858 to the dollar, up from Wednesday's close of 6.5885. It has now risen 3.65 percent since its depegging from the dollar in mid-June.

The yuan can trade up or down a maximum 0.5 percent from its central parity rate on a given day.

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Traders have long predicted the yuan will appreciate 5 to 6 percent this year as the currency's appreciation could help the nation's fight against high consumer inflation, which hit 4.9 percent in January.

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

Benchmark one-year dollar/yuan non-deliverable forwards (NDF) were bid at 6.4190 at midday versus 6.4130 at Wednesday's close. Their implied yuan appreciation in a year's time fell to 2.51 percent from 2.61 percent.

NDF-implied yuan appreciation has persistently lagged behind 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 favor of dollar assets as the US economy recovers.

Reuters