SHANGHAI: China's yuan hit a record high against the dollar for a second straight day on Tuesday, thanks to sustained bullish sentiment for the currency from Chinese companies, with further gains seen in the near term.
The central bank allowed the yuan a bit more room to rise by setting the midpoint fix at 6.2891 per dollar, slightly stronger than Monday's fix of 6.2920.
That marked the sixth straight day of stronger fixes by the central bank and the strongest midpoint since mid-May.
The spot yuan opened at its 1 percent limit of 6.2262 and held close to that level before ending at 6.2265.
The spot exchange rate has been allowed to diverge from the official midpoint by 1 percent in either direction since April, when the PBOC widened the band from 0.5 percent.
This marked the seventh consecutive trading day where the rate has effectively glued itself to the strong edge of the trading band.
An FX trade manager at a joint-stock bank in Shanghai said that the disconnect between the central bank midpoint and the market's spot rate had led to a "vicious cycle".
"The yuan rises to the top of the band and then there's nothing that can be done. The FX market can't really trade all day. It's a headache for the banks," he said.
Traders expected the dollar/yuan exchange rate to keep climbing in the near term, with some predicting it could strengthen to around 6.2000 if the People's Bank of China (PBOC) continues to allow the midpoint to rise.
Traders said market participants are keen to offload hard currency accumulated during the first seven months of the year, when the dollar rose against the yuan.
The excess supply of dollars has been further aggravated by a recent recovery in China's exports, which have poured more dollars into the market.
Since a year-low in late July, the yuan has appreciated over 2.6 percent against the dollar. It is up over 1 percent so far this year.
Analysts said the recent tug-of-war between the central bank's midpoint and the market rate has raised questions as to whether the central bank will eventually have to intervene to cool off the yuan's rally.
A sustained strengthening of the yuan might damage China's export competitiveness even as the broader economy is showing signs of recovery, economists said.
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