SHANGHAI: The yuan firmed against the dollar on Friday, hitting an intraday record high for the second straight day, but gains for the week were moderate so far, signalling that the potential for sharp appreciation was limited, traders said.
The People's Bank of China (PBOC) set its yuan midpoint slightly stronger for the second straight day, in an indication that it would tolerate mild yuan appreciation. But there was no evidence that the central bank had intervened in trading to boost the yuan's value, as some had speculated, traders said.
"Clients' dollar sales are the key factor for the yuan to rise this week," said a dealer at a US bank in Shanghai.
"It doesn't make sense for the PBOC to intervene in trading to boost the yuan's value at a time when weak global economic and market conditions are exerting pressure on China's exports."
Spot yuan was trading at 6.2670 versus the dollar at midday, up from Thursday's close of 6.2770.
It hit an intraday high of 6.2654 in early trade, its highest level since China set up the domestic foreign exchange market in 1994 and surpassing Thursday's historical intraday high of 6.2761.
Dollars sold by Chinese companies have flooded in since China's onshore market resumed trading on Monday after a week-long holiday, an indication of capital inflows. But the yuan's rise has remained moderate at only 0.3 percent so far this week, slightly less than the week before the holiday.
Since mid-September the yuan has reversed a trend of depreciation seen earlier this year. The US Federal Reserve's launch of a third round of quantitative easing (QE3) has sparked strong interest in riskier assets such as emerging market currencies, while depressing the US currency.
The PBOC had set a slew of midpoints weaker than the yuan's trading levels since then, in what traders said was a sign that the authorities were worried about the impact of a strong currency on China's weakening exports.
On Friday, the PBOC set the yuan's midpoint at 6.3264 versus the dollar, slightly stronger than Thursday's 6.3391 and implying that the central bank could tolerate slight yuan appreciation.
But Friday's midpoint was still much weaker than the yuan's trading levels.
Judging from the current PBOC stance, several traders said they believed the central bank would allow the yuan to rise no more than 1 percent this year compared to end-2011. That would put the yuan at 6.2322 by the end of the year.
Driven by QE3, the yuan has now risen 0.43 percent versus the dollar so far this year, reversing a fall of 1.6 percent by late July.
"The yuan's recent appreciation has been a rebound instead of the establishment of a new round of solid rises," said a trader at a major European bank in Shanghai.