China's central bank guided the yuan higher at the sharpest pace since 2005 on Friday in a move analysts attributed to the dollar's weakness against major currencies.
The central bank, the People's Bank of China (PBOC), set the midpoint of the against the dollar at 6.4589, down 0.56 percent compared with the previous fix at 6.4954. That's the biggest change since 2005, when China removed its peg to the dollar.
The pair was trading at 6.4743 midday Friday, compared with Thursday's close 6.4779.
The PBOC allows the yuan spot rate to rise or fall a maximum of 2 percent against the official fixing rate, which is set daily.
The cause of the jump in the yuan's level may be driven by forces outside China. The , which measures the dollar against a basket of currencies, has fallen 1.7 percent this week. The Japanese yen, in particular, has risen sharply against the greenback.
"Blame the Bank of Japan (BOJ)," said Patrick Bennett, a foreign-exchange strategist at CIBC. He noted that China now manages the renminbi against a trade-weighted basket of currencies. The BOJ's surprise decision Thursday to sit pat on policy caused the yen, one of the basket's components, to surge. The yen composes nearly 15 percent of the currency basket.
The euro, which makes up more than 20 percent of the basket, has also climbed this week, tacking on as much as 1.56 percent against the dollar.
Others pointed to recent U.S. gross domestic product (GDP) data and the U.S. Federal Reserve's post-meeting statement earlier this week.
"Today's strong fixing is triggered by the less upbeat U.S. GDP data after the Fed did not signal a rate hike in June," Iris Pang, senior economist for Greater China at Natixis, said in a note Friday. "We believe that the central bank is doing this intentionally as if the yuan is just one of the major currencies in the world, [it's move] should align with those currencies."
Advance figures for GDP in the first quarter showed the economy grew by a less-than-expected 0.5 percent, compared with expectations for 0.7 percent. The Fed's statement opted for caution, holding rates steady amid the apparent economic slowdown.
Many market participants had expected the BOJ would ease further after its surprise decision at the end of January to shift to a negative interest rate policy largely failed to spur bank lending, weaken the yen or boost economic activity. Since the end of January, the yen has climbed, with the dollar fetching 107.30 yen midday Friday, down from levels over 120 yen before the BOJ's policy change.
The rise in the mainland's currency marks a sharp reversal from expectations near the beginning of the year, when traders were betting on further declines in the currency. The yuan has strengthened to trade near levels it touched in December of last year.
In August of last year, China shifted the market mechanism for setting its daily fixing, saying it would set the spot rate based on the previous day's closing, theoretically allowing market forces to play a greater role in its direction. That resulted in an effective 2 percent devaluation in the currency, a move which sparked fears of a "currency war" to make Chinese exports more competitive.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1