China's yuan closed up slightly against the dollar in thin trade on Tuesday, the last day before the week-long Lunar New Year holidays. Dealers said the yuan was likely to appreciate at a faster pace after the break. The yuan finished at 7.1840, up from Monday's close of 7.1884.
The central bank fixed the yuan's daily mid-point against the dollar at 7.1846, up from Monday's 7.1923 and the reference rate's highest level since the Chinese currency was revalued in July 2005. "By setting the mid-point at a post-revaluation high just before the holiday, the central bank is hinting at faster appreciation afterwards," said a dealer at a US bank in Shanghai.
Authorities are expected to announce January's consumer price inflation data soon after the holiday, with the market predicting another 11-year high of around 7 percent, partly as a result of freakish winter weather in recent weeks.
The central bank appears to have few options to fight inflation other than yuan appreciation, given the large spread - over a percentage point - of US interest rates below Chinese rates, and amid signs that China may ease its own monetary policy in response to slowing US economic growth. The World Bank on Monday scaled back its projection for Chinese growth to 9.6 percent in 2008 from 10.8 percent forecast in September.
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