China's yuan advanced to the highest since a link to the dollar was abandoned in July 2005, when a daily trading limit of 0.3 percent was introduced and later expanded to 0.5 percent. The combination of the world's fastest economic growth, the highest inflation rate in 11 years and the rising cost of intervention will force gains in China's yuan to accelerate, say Pacific Investment Management Co. and Pictet & Cie., Switzerland's largest closely held private bank.
The yuan gained 0.28 percent to 7.1623 per dollar as of the 5:30 p.m. close in Shanghai, from 7.1825 on Feb. 15, according to China Foreign Exchange Trade System. That's the biggest advance since Jan. 3. Evans of State Street forecast the yuan will rise to 6.8 by the end of June and 6.5 by year-end.
Gains in the yuan may help China slow growth in the trade surplus, which has flooded the economy with cash. A stronger currency would push up the price of exports and make imports cheaper. China's producer prices rose 6.1 percent in January from a year earlier, the fastest pace in more than three years, a government report showed today.
After rising 7 percent last year, the yuan has appreciated 1.9 percent so far this year in 2008. Forward contracts show traders are betting on a 9 percent advance to 6.58 in the next 12 months.
China's currency has fallen 6 percent against the euro since a link to the dollar was scrapped in 2005, prompting calls from European officials including French President Nicholas Sarkozy to allow faster gains. Some U.S. lawmakers also claim China's currency is kept undervalued to make exports competitive.