SHANGHAI: The yuan strengthened on Wednesday, approaching a key resistance at 6.30 against the dollar as the People's Bank of China tolerated the Chinese currency's rise by fixing a stronger mid-point, traders said.
The market expects the yuan to stage another leg of modest appreciation ahead of a visit to the United States by Chinese leader-in-waiting Xi Jinping in mid-February and to topple its historical trading record high of 6.2919 set in early January.
Still, the currency is not expected to move far stronger than 6.3 and is more likely to pivot in a narrow range in the first quarter as China evaluates the impact on its exports from a weak global economy and the euro zone debt crisis, they said.
"The government will choose to balance political needs and economic reality," said a senior trader at a Chinese commercial bank in Shenzhen.
"So the yuan is likely to hit a few record trading highs in the coming two weeks but will still not move far stronger than 6.3."
Spot yuan was trading at 6.3065 versus the dollar at midday, stronger than 6.3085 at Tuesday's close after the PBOC fixed a slightly stronger mid-point of 6.3103 against Tuesday's 6.3115.
On Tuesday, the currency staged its biggest single-day rise amid mounting speculation that it would see another leg of appreciation in the next two weeks.
After appreciating sharply in the last few days of 2011, the yuan fell back in early January and has traded mainly in a narrow range of 6.31 - 6.32 per dollar, as the central bank has kept the exchange rate basically stable due to uncertainty about a slowing economy and weakening foreign demand.
POLITICS VS ECONOMY
China has long faced pressure from the United States to let its currency appreciate to help balance bilateral trade but it has repeatedly said it needs to decide the yuan's exchange rate in line with its own economic conditions.
In reality, the government has allowed the yuan to rise intermittently and especially during state visits of the countries' leaders, viewed by the market as goodwill and diplomatic gestures due to the importance of ties between the world's two biggest economies.
US President Barack Obama will host China's likely next leader, Vice President Xi, at the White House on Feb. 14.
Still, there have been uncertainties surrounding China's economy due in part to global weakness.
China's factory activity shrank for a third successive month in January, a private-sector survey of purchasing managers showed on Wednesday, reinforcing views that Beijing's pro-growth policy stance will stay.
And Finance Minister Xie Xuren said in remarks published on Wednesday that China's economy faces downward risks in 2012, as the weakening external demand adds more difficulties to the growth of the country's export sector.
However, China's big manufacturers started the year with a slight upturn in production, an official purchasing managers' index (PMI) showed on Wednesday.
"Politics will play a short-term role ahead of Xi's visit to Washington while economic reality will prevail in the medium term," said a trader at a European bank in Shanghai.
In the offshore non-deliverable forward market, one-year NDFs traded at 6.2750 around midday, implying 0.56 percent yuan appreciation over the next year, compared with a 0.45 percent rise implied at Tuesday's close.
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