The yuan recorded its highest ever closing against the dollar on Friday after the central bank fixed the mid-point at a record for a second day, in a clear sign the government is willing to let the Chinese currency appreciate to help fight inflation.
Traders have long predicted the yuan will appreciate 5 to 6 percent this year. China is expected to use the currency as part of its strategy to fight high consumer inflation, which was 4.9 percent in January. Spot yuan closed at 6.5732 against the dollar, up from Thursday's close of 6.5871 and having now risen 3.85 percent since its depegging from the dollar in June 2010. It touched an intraday high of 6.5721 and low of 6.5875.
Before trade began, the People's Bank of China set the yuan's daily mid-point at 6.5781, up from Thursday's fixing of 6.5800. The mid-point, from which the yuan can trade up or down a maximum 0.5 percent in a given day, is the tool the central bank uses to express the government's intentions for the currency.
"Many of us believe the government has a sort of undeclared, tentative target for yuan movements in a month, a quarter and in a year," said a trader at a North American bank in Shanghai. Dollar/yuan offshore forwards rose slightly on Friday to imply less yuan appreciation after US Federal Reserve officials raised their forecasts for economic growth.
Benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4200 in late trade versus 6.4160 at Thursday's close. Their implied yuan appreciation in a year's time fell to 2.47 percent from 2.53 percent. NDF-implied yuan appreciation has persistently lagged market expectations over the past couple of months as dealers said hedge funds, the main players in the forwards, cut back on exposure to Asian emerging markets in favour of dollar assets as the US economy recovers.
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