×

Yuan Hits a High Against U.S. Dollar After Bank Reserve Hike

The yuan hit a post-revaluation high against the U.S. dollar on Friday after the central bank announced a 0.5% point rise in banks' reserve requirement ratio on Thursday.

Dealers said the monetary tightening, to take effect on April 16, would temporarily reduce yuan supplies in China's foreign exchange market, although it would not completely solve the problem of excess yuan liquidity in domestic capital markets.

"Banks will be preparing money for extra reserves," said a Shanghai dealer at a European bank. "But the hike's long-term impact on the yuan's exchange rate will be limited."

The central bank's sixth reserve requirement increase since last June merely confirms a monetary tightening bias that the markets had already expected to continue at least until late this year, dealers said.

The yuan hit 7.7236 against the dollar in early trade, its highest level since Beijing revalued it and depegged it from the dollar in July 2005. The previous high was 7.7240, set on Thursday.

It trimmed its gains slightly to trade at 7.7244 in the Asian session, little changed from Thursday's close of 7.7243.

Before the start of trading, the central bank had set the yuan's mid-point at a post-revaluation high of 7.7251, up from Thursday's mid-point of 7.7268. "Both the central bank and the market are willing to see the yuan rise a bit faster following a slowdown in appreciation over the past two months," said a dealer at a major Chinese commercial bank.

The yuan is now set to break through the psychologically important 7.7200 mark later on Friday or next week, dealers said.

Before Friday's rally, the yuan had risen only 0.4% since early February, translating into an annual pace of about 2.5%, compared with 3.4% last year. The slowdown was partly due to market concerns over China's rising inflation.