SHANGHAI: China's yuan hit a three-month high against the dollar on Wednesday as China and United States started their annual Strategic and Economic Dialogue, which will help set the tone for relations between the world's top two economies in the coming year.
The People's Bank of China (PBOC) fixed its midpoint at 6.1565, up an unusually large 0.1 percent from Tuesday's official rate, echoing past episodes where it guided the yuan to rise slightly during major political events, such as the annual US-China talks, traders said.
Spot yuan stood at 6.1966 per dollar by midday, 0.09 percent firmer from Tuesday's close, after hitting an intraday high of 6.1940, its highest level since April 9.
"Today's firmer midpoint is another traditionally Chinese goodwill gesture to the United States because of the US-China dialogue," said a trader at a major European bank in Shanghai.
"But as proven by the past experiences, such politics-driven brief strength in the yuan will not last. The yuan is set to continue its range-bound trading in coming weeks."
The two-day US-China talks will likely touch on China's currency, North Korea's nuclear programme and escalating tensions between China and neighbours in the South China Sea and with Japan in the East China Sea.
As the dialogue began, US Treasury Secretary Jack Lew said that moving to a market-determined exchange rate will be a crucial step for China in comments that imply consistent US stand for the yuan to appreciate, which the United States believes will help improve its employment.
China has yet to state its positions in the talks, but it has all along stressed that the value of the Chinese currency has little to do with US jobs, and that the yuan's value has now reached a rough equilibrium after a more than 30 percent appreciation since its landmark revaluation in 2005.
Traders say the Chinese stand means that the yuan's value will now be more determined by China's economic performance as well as dollar supply and demand in the market. For most parts of the past decade, however, the value has mainly echoed the Chinese monetary authorities' views towards the currency.
Data on Wednesday showed China's annual consumer inflation cooled slightly more than expected in June, pointing to lingering weakness in the economy which could prompt Beijing to launch more stimulus steps to shore up growth.
The consumer price index (CPI) rose 2.3 percent in June from a year earlier, missing the market forecast of 2.4 percent.
"June inflation data shows that the economy remains relatively weak, capping the potential for the yuan to appreciate in the near term," said a trader at a Chinese commercial bank in Shanghai.
The yuan could move narrowly around 6.20 versus the dollar in coming weeks, waiting for fresh market-moving factors, such as more economic data for June to be issued this week and next and new guidance from the PBOC's midpoint, traders said.
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