Yuan Rises to Highest Since Peg Ended


The yuan climbed to the highest since China ended a dollar peg in 2005 as the central bank stepped up efforts to curb inflation at an 11-year high.

China has allowed a 3.4 percent gain in the currency this year, almost half the advance for the whole of 2007, as it seeks to cut the cost of imported goods and slow export growth. The People's Bank of China yesterday ordered banks to set aside more reserves for the second time this year as it aims to slow expansion in money supply.

The yuan rose 0.26 percent to 7.0630 versus the dollar as of 5:30 p.m. in Shanghai, the biggest gain this month, according to the China Foreign Exchange Trade System. Wee raised his year- end forecast for the yuan last week to 6.5 per dollar, from 6.7.

Premier Wen Jiabao pledged this month to narrow China's record trade surplus that has flooded the economy with cash, swelled currency reserves to $1.5 trillion and fuelled tensions with the U.S. and Europe, its largest trading partners. Exports grew at their slowest pace in almost six years last month.

Lenders must place a record 15.5 percent of deposits with the central bank, up from 15 percent previously, the central bank said in a statement on its Web site yesterday.

Gains in the yuan have trailed behind some other Asian currencies in the past month, suggesting China may have been intervening to slow its appreciation. The yuan has risen 1.2 percent against the dollar in the period, while the yen has gained 8.3 percent and the Taiwan dollar 3.3 percent. Wen said yesterday he is monitoring global market turbulence and is concerned about the dollar's slump.

The dollar may keep falling in the first half of 2008 because of the weakening U.S. economy, the central bank said in its 2007 international financial market report today.

The Federal Reserve cut its main lending rate by 0.75 percentage point to 2.25 percent yesterday, the sixth reduction starting September, increasing China's yield advantage.

 


TradingEconomics.com, Bloomberg
3/19/2008 6:56:21 AM