China's yuan softened against the dollar on Wednesday, partly because of the strength of the US currency on global markets, but dealers said most onshore traders expected the yuan to resume rising soon.
The yuan closed at 7.9486 to the dollar, but was still much higher than 7.9555, the mid-point set by the central bank on Wednesday morning. It was the fourth straight day that the yuan closed considerably higher than its central bank-set mid-point.
This suggested that while the central bank was trying to halt yuan appreciation for now, the market expected it to resume soon and was in no mood to push the yuan down, dealers said. "It appears the market disagrees with the central bank's mid-points in recent days," said a dealer at a European Bank.
"Most of us think 7.9400/7.9500 is an appropriate range for now, and it seems the central bank isn't fighting back as it has largely stayed out of the market these days." Some traders said increased pressure for appreciation at home and abroad was buoying the yuan, even though China has often resisted such public pressure in the past.
This month's International Monetary Fund meeting in Singapore is fanning speculation about international diplomatic pressure to strengthen the yuan, as is US Treasury Secretary Henry Paulson's maiden visit to China later in the month.
Paulson was quoted by the Wall Street Journal as saying he wouldn't engage in China-bashing and would instead seek to persuade Americans that they stand to benefit from China's economic rise. He warned US Senators against protectionism and against expecting quick results from his China trip.
However, Paulson was set to warn China that "maintaining an overly rigid exchange rate and relying on administrative controls... increase the risk of boom-and-bust cycle", and to remind the Chinese of "the fact that their currency exchange rate is increasingly being viewed by their critics as a symbol of unfair competition", the newspaper said.
Qing Wang, economist at Bank of America, believes China will resort more to currency reforms to help cool its economy after data issued this week, including a record monthly trade surplus, continued to point to possible overheating of the economy.
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