Yuan closes at record high as central bank tolerates rise

SHANGHAI: The yuan closed at a record high against the dollar on Thursday as the People's Bank of China (PBOC) set its yuan midpoint stronger than expected, signaling tolerance for appreciation, traders said.

There was little sign of central bank intervention via state-owned banks to boost the yuan, but the PBOC's tolerance of a stronger yuan did encourage companies to keep selling dollars as they have done throughout this week, traders said.

Spot yuan closed at 6.2770 versus the dollar, up from Wednesday's close of 6.2833. It hit an even higher intraday high of 6.2761 in late trade, the strongest since China set up the domestic foreign exchange market in 1994.

Firms sold dollars which had flooded into China's onshore market after it resumed trading on Monday following a week-long holiday.

"Company were eager to trade dollars for yuan," said a dealer at a major Chinese commercial bank in Shanghai.

"The PBOC's non-action encouraged corporates to settle the yuan at high levels."

The central bank set the yuan's midpoint at 6.3391 versus the dollar, slightly stronger than Wednesday's 6.3449.

Typically, the PBOC will set a weaker midpoint in response to a rise in the dollar index.

"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.

Even with the stronger midpoint, the intraday high came very close to the maximum 1 percent daily divergence permitted by the central bank.

The PBOC has set midpoints much weaker than the yuan's trading levels since mid-September, in a sign that the authorities, worried by China's weakening exports, were trying to prevent the currency from appreciating too sharply, traders said.

In September, the yuan posted its biggest monthly gain of the year thanks in part to the US Federal Reserve's launch of a third round of quantitative easing (QE3) which sparked interest in riskier assets.

But traders said they still expected the central bank's tolerance of yuan appreciation would be limited.

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.