Currencies

China’s yuan flexes muscle as US crisis rattles on

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The Chinese yuan hit a record high against the dollar for a third straight day on Wednesday, in what some analysts see as a sign of Beijing allowing the yuan to flex its muscles as a global currency.

The , also known as the renminbi, strengthened to as much as 6.0965 to the dollar. It has gained just over 2 percent this year at a time when other Asian currencies have tumbled.

And the latest push higher comes against a backdrop of general dollar weakness amid jitters about a political impasse in Washington that has raised the risk of the world's biggest economy defaulting on its debt.

(Read more: Markets trust Washington, but for how long?)

"Lingering political uncertainty in the U.S. could be seen as an opportunity by China to flex its muscles a little bit and extend its hegemony," said Nizam Idris, managing director, head of strategy, fixed income and currencies at Macquarie Bank. "This is one reason for the currency's strength."

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China's central bank allows the yuan to trade within 1 percent on either side of a midpoint that it sets each day.

The yuan has traded in a tight range for two months. Analysts say the fact that the central bank has allowed the yuan to break higher, especially after data at the weekend showed an unexpected fall in September exports, is interesting.

(Read more: China central bank underlines reform push with record yuan)

"There has been a great deal of discussion about the U.S. standoff, which not only gives the Federal Reserve reason to continue QE [quantitative easing] longer, which is dollar-negative, but whatever deal gets done will have to be revisited early next year," saidWestpac Bank's Senior Currency Strategist Sean Callow.

"The U.S. dollar is coming out of this as damaged goods and the PBOC [People's Bank of China] is allowing some movement in the yuan," he added.

Macquarie's Idris said that although he was sticking to his year-end target for the yuan to firm to 6.08 to the dollar, if the current trend persists the yuan could get closer to 6.05 in the months ahead.

He added that another reason China may be allowing the yuan to creep higher is to help contain inflation. Data on Monday showed China's annual consumer inflation rate rose to a seven-month high in September at 3.1 percent.

(Read more: Is inflation a new risk for China's economy)

Safe haven?

Chris Weston, chief market strategist at IG, a trading firm, said the yuan was increasingly being viewed as a safe-haven amid uncertainty in market and the turmoil in emerging markets this year on expectations for an unwinding of the Fed's asset-purchase program.

Data released earlier this week showed China's foreign exchange reserves, the biggest in the world, rose to $3.66 trillion at the end of September from $3.5 trillion at the end of June.

(Read more: As China's foreign reserves surge, are currency wars back?)

"I think the yuan would be much higher if it wasn't for handling by the central bank," said Weston.

"Look at the latest FX reserves data: It's clear that while other emerging markets have seen outflows China has seen inflows. China is being seen as safe-haven in the current climate," he added.

— CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC