Yuan edges up, but dollar demand caps sharp rise

SHANGHAI: The yuan rose slightly against the dollar on Friday after the People's Bank of China set a new peak for the mid-point, but the yuan hesitated around 6.49 as dealers reported large dollar demand from corporate clients.

The Chinese central bank set the yuan's daily mid-point at a record high, clearly breaking past the psychological level of 6.5 per dollar, which reflects its intention to let the yuan rise above this level in the future, dealers said.

Dollar demand, which had caused spot yuan to rise further, was mainly propelled by increasing foreign trade and overseas acquisitions by major Chinese companies, particularly those in the oil, mining and auto industries, dealers said.

More business abroad also increased the demand for hedging, while some Chinese companies may also have borrowed dollars for onshore and offshore arbitrage, they said.

"The yuan is hovering around this level due to dollar demand from large companies," said a dealer at a Chinese commercial bank in Shenzhen.

Policymakers in Beijing have made it increasingly clear that they are willing to use the currency as one way of fighting inflation, which eased a touch to 5.3 percent in the year to April from a 32-month high of 5.4 percent in March.

Before trade began, the PBOC set the yuan's daily mid-point at 6.4898 against the dollar, up from Thursday's 6.4921. The central bank uses the mid-point to guide the currency.

Spot yuan was at 6.4897 versus the dollar by midday compared with Thursday's close of 6.4915. The Chinese currency has now appreciated 5.19 percent since it was depegged from the dollar in June 2010, and 1.51 percent since the start of this year.

But some traders said the market also remained cautious as any variable in the euro zone crisis could spark a rebound in the dollar.

"The dollar's pullback attracts dollar demand. It's quite natural," said a dealer at a Chinese bank in Shanghai. "But uncertainty in the international market still has potential to drag on the yuan."

Offshore, one-year non-deliverable forwards (NDFs) were bid at 6.3660, down from 6.3720 at Thursday's close. Their implied yuan appreciation in a year's time was 1.94 percent versus 1.85 percent previously.

Copyright Reuters, 2011