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China's yuan hits record high, tests strong-side band limit

Thursday, 25 Oct 2012 | 4:48 AM ET

* Yuan hits all time record high in morning trade

* Comes within 0.01 pct of the strong-side trading limit

* C.bank sets stronger mid-point after four days of weakening

* Short covering by dealers adds to strong corporate demand

Oct 25 (Reuters) - China's yuan touched its strongest ever level on Thursday and crept within a whisker of its strong-side limit, as dealers said short covering added to strong corporate demand for yuan.

The spot exchange rate hit a strong point of 6.2422 per dollar in morning trade, firming from Wednesday's close of 6.2480.

The yuan's gains put the exchange rate 0.9913 percent away from the mid-point. The rate is permitted to rise or fall 1 percent from the mid-point set by the central bank each day.

The People's Bank of China set its midpoint at 6.3047 on Thursday, moderately stronger than Wednesday's fix.

That broke a string of four successively weaker fixings that began last Friday and suggests the central bank is keen to avoid the strong side limit being breached.

The dollar index, was flat against yesterday's open, but weakened slightly overnight. The yuan usually strengthens as the greenback loses ground.

But recent moves suggest that domestic factors are driving the exchange rate's recent movements, following a period in which the yuan closely tracked the euro and other non-dollar currencies.

Since the band was introduced in April, the spot rate has only come closer to breaching the strong side limit once before, when it diverged by 0.9928 percent on Oct. 11.

The yuan's strength indicates that traders are willing to push towards the strong-side limit as they unravel long dollar positions built up in the first half of the year, when the dollar rose on safe-haven demand.

Traders also noted that the relatively wide gap between the Wednesday's close of 6.2480 and the Thursday's opening price of 6.2450 opened a short yuan position in the market, creating pressure on dealers to buy yuan in order to cover.

The yuan has now come within 0.1 percent of the strong-side limit ten times this month, while the twenty occasions on record when it came the closest to breaching the limit have all occurred in September and October this year.

Since the yuan hit its weakest point of the year at 6.3967 in late July, the currency has now strengthened over 2.4 percent and 0.8 percent since the start of 2012.

(Editing by Simon Cameron-Moore)