Yuan rises vs dollar, further gains expected

SHANGHAI: The yuan rose slightly against the dollar on Tuesday after the People's Bank of China set a stronger mid-point, with dealers expecting further gains.

"The yuan's uptrend is clear but the pace should be gradual," said a dealer at a Chinese bank in Shanghai.

Spot yuan was at 6.4708 versus the dollar on Tuesday, edging up from Monday's close of 6.4772.

The Chinese currency has appreciated 5.49 percent since it was depegged from the dollar in June 2010, and 1.80 percent since the start of this year, gaining at a pace faster than the market had previously expected.

Dealers expect the Chinese currency to rise further as the government continues to use the foreign exchange rate to help fight inflation.

Before trade began, the PBOC set the yuan's daily mid-point at 6.4723 versus the dollar, strong than Monday's 6.470, following a 0.5 percent fall in the dollar index on Monday.

The central bank uses the fixing to express its intention for how the yuan should move. It has guided the yuan upwards by setting a string of record-high mid-points so far this year.

Benchmark one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3960, little changed from the previous day's close of 6.3980. Their implied yuan appreciation in a year's time edged up to 1.19 percent from 1.16 percent.

The NDFs appear to have lost their function of helping to forecast the prospect of yuan gains in recent months as they have not responded to the yuan's repeated record highs, with traders citing a diversion of funds to Hong Kong's expanding offshore yuan business as a key factor.

Copyright Reuters, 2011