The yuan rose against the dollar on Thursday, encouraged by the Chinese central bank's decision to set a slightly stronger reference rate despite the dollar's firmness in global markets. The Chinese currency hit a new post-revaluation high of 6.9350 and closed at 6.9381 against Wednesday's finish of 6.9444, after the central bank set a mid-point of 6.9402, up from Wednesday's 6.9408.
The stronger yuan mid-point appeared to confirm that Chinese authorities remained committed to yuan appreciation, and this boosted the currency in the forwards markets on Thursday.
The yuan looks set to appreciate about 0.7 percent against the dollar in May. That would be slower than its monthly pace of over 1 percent in the first quarter of this year, but would still mark a return to significant appreciation after the central bank engineered a near-standstill in April. Nevertheless, the market remains nervous about the central bank's intentions given uncertainty over China's inflation and global economic growth. It also fears the central bank could engineer considerable short-term volatility at any time in an effort to squeeze speculators bringing money into the country.
"The market now expects the central bank to allow the yuan to appreciate at a pace of 0.5 to 0.9 percent each month in the next several months," said a dealer at a major European bank in Shanghai.
"But such a rise is very likely to be concentrated in one or two weeks each month, while the central bank could use the remaining time to engineer temporary pull-backs to deter speculators."
The yuan rebounded moderately in the offshore forwards market on Thursday. One-year non-deliverable dollar/yuan forwards were down at 6.5130 in late trade from Wednesday's close of 6.5235. This implied expectations for yuan appreciation of 6.56 percent in 12 months from Thursday's spot mid-point, up slightly from 6.40 percent implied late on Wednesday.
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