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China's Yuan Hits New High After Strong Mid-Point

Reuters
Tuesday, 8 May 2007 | 12:39 AM ET

China's yuan hit a post-revaluation high against the U.S. dollar on Tuesday after the central bank set its mid-point at a record level, but there was no clear indication that yuan appreciation would speed up in the near term, dealers said.

Before trading began on Tuesday morning, the first day after a week-long labor day market recess, the People's Bank of China set the yuan's daily mid-point at 7.6951 to the dollar, breaching the psychologically important level of 7.7000 for the first time.

Traders attributed the strong mid-point to general weakness in the dollar on global markets.

Market expectations of a rate hike by Beijing, most likely in the second half, also helped to set the yuan on an uptrend, they added.

The central bank has been focusing on tightening monetary policy to absorb excess money market liquidity. Last month, it ordered banks for the second time in a month to hold more of
their deposits in reserve, in its latest move to curb credit growth and prevent overheating of the economy.

Many economists and analysts are expecting further tightening measures to follow later in the year, including a rate hike in the next couple of months.

A faster rise in the yuan before a U.S. congressional hearing on Wednesday on foreign currency manipulation may ease outside pressure on China over its currency, some traders said, although Beijing has insisted on pursuing an independent foreign exchange policy.

"I have to say that Wednesday's hearing may have played a role in the strong yuan today," said a Shenzhen-based trader with a major Chinese bank.

He added that the yuan could give up its gains later in the week, as sudden pickups in the rate of appreciation have tended to be followed by a period of consolidation.

The yuan has appreciated a further 5.4% since July 2005. Traders expected it to continue in a steady uptrend and there were no indications that the central bank would accelerate the pace of yuan appreciation over the longer term.

For the full year, many local dealers expect the currency to rise 4% against the dollar.

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