Yuan hits high

China's yuan hit a new high against the dollar on Thursday after moderate statements on the currency issue by US officials convinced traders that gradual but constant appreciation would continue. But the Chinese currency tumbled in the last 20 minutes of trade to finish lower, in what traders described as a technical move caused by the closing of dollar short positions.
The yuan finished at 7.6430 to the dollar, down from Wednesday's close of 7.6360, after hitting an intra-day high of 7.6248 in early trade - the highest level since Beijing abolished its peg to the dollar in July 2005.
The US Treasury Department on Wednesday labelled China's currency "undervalued" and pledged to keep pushing for it to appreciate, but again declared in a semi-annual report that Beijing was not manipulating its currency for trade gains.
The Bush administration also rejected another request from US lawmakers for a formal investigation into whether China's currency policy was an unfair trade practice. It said "firm engagement" with China was the best way to address the issue.
In the days before the Treasury report, China's central bank had used its daily reference rate to engineer sharp swings in the yuan against the dollar, including its second-biggest three-day fall since the revaluation, and its largest daily gain.
This raised fears that the two countries might be heading for a confrontation over currencies, and caused some traders to speculate the Chinese central bank could temporarily slow yuan appreciation to retaliate against US pressure.
The moderate Treasury report therefore restored confidence that the yuan would continue rising against the dollar at its previous annual pace of about 4 to 5 percent, and made some banks more comfortable about buying yuan on Thursday, traders said.
"The market feels more at ease after the Treasury report," said a Shanghai dealer at a European bank. "The yuan will move in line with previous expectations - rising in a slow but steady way, with the central bank still holding the key to the pace."
Four US senators unveiled on Wednesday a trade bill designed to force China to let the yuan rise faster. But the Shanghai market believes the Bush administration will prevent passage of any tough bill - and that even if legislation passes, China will continue refusing to accelerate yuan appreciation.
"Our feeling is that this bill, even if passed, will not materially affect the trade relations between the two nations," Deutsche Bank said in a report. "When it comes to the time to discuss specific tariff actions on Chinese imports, there will be substantial resistance from within the US against any drastic proposals. That is, the chance of eventual imposition of 20-30 percent tariffs on all Chinese goods is slim."