SHANGHAI: The yuan strengthened against the dollar on Thursday, briefly hitting an intraday record high after the People's Bank of China (PBOC) set its yuan midpoint stronger than expected, signalling it may tolerate slight appreciation of the currency, traders said.
Transactions betrayed little evidence that the central bank had intervened in trading to boost the yuan's value via state-owned banks, as some parts of the market are speculating, but the PBOC's strong midpoint did encourage companies to continue selling dollars, traders said.
In a sign of capital inflows, the Chinese currency has rallied strongly this week as corporates sold dollars, which have flooded in since China's onshore market resumed trading on Monday after a week-long holiday, traders said.
"The PBOC's yuan midpoint today is unexpectedly strong given the recent strength in the dollar index. That has boosted sentiment towards the yuan," said a dealer at a major European bank in Shanghai.
Typically, the PBOC will set a weaker midpoint in response to a rise in the dollar index.
"Still, no transactions reflect that major state-owned banks are mass selling dollars in trading -- a typical sign that the PBOC is intervening in the market to boost the yuan's value."
Spot yuan was trading at 6.2796 versus the dollar at midday, up from Wednesday's close of 6.2833.
It hit an intraday high of 6.2781 in early trade, its highest level since China set up the domestic foreign exchange market in 1994.
That surpassed the previous high touched on Monday, when the currency hit 6.2812 after scoring its biggest monthly gain this year in September, partly because the US Federal Reserve's launch of a third round of quantitative easing (QE3) has sparked strong interest in riskier assets such as emerging market currencies, while depressing the US currency.
Before Thursday's trading began, the PBOC set the yuan's midpoint at 6.3391 versus the dollar, slightly stronger than Wednesday's 6.3449.
The central bank has set a slew of midpoints much weaker than the yuan's trading levels since mid-September, in what traders said was a sign that the authorities, worried by China's weakening exports, were trying to prevent the from appreciating too sharply.
"Thursday's midpoint implies the PBOC may permit the yuan to rise slightly, possibly to ease pressure for the yuan to appreciate from the United States in its elections year," said a trader at a Chinese commercial bank in Shanghai.
"But we expect the central bank's tolerance of yuan appreciation will be very limited."
Judging from the current PBOC stance, several traders said they believed the central bank would allow the yuan to rise no more than 1 percent this year compared to end-2011. That would put the yuan at 6.2322 by the end of the year.
Driven by the QE3, the yuan has now risen 0.22 percent versus the dollar so far this year, reversing a fall of 1.6 percent by late July.
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