The Chinese yuan on Tuesday staged its biggest single-day gain against the US dollar since its revaluation, buoyed by comments from Federal Reserve Chairman Ben Bernanke and a temporary yuan liquidity shortfall.
Bernanke said on Monday that both China and the world economy would be better served if Beijing allowed the value of the yuan to be determined by a more flexible, market-oriented system.
US officials have previously made such comments without moving the yuan. But two factors on Tuesday ensured Bernanke's remarks had an impact.
One factor was an unexpectedly strong yuan mid-point set by the central bank. Despite the dollar's firmness overseas, the mid-point was set at 8.0073 compared with Monday's mid-point of 8.0161.
"Many in the domestic market interpreted Bernanke as saying 'We are still watching you'," said a Shanghai-based dealer at a European bank. "Some believe his remarks were related to the yuan's stronger-than-expected mid-point today."
In addition, short-term yuan interest rates rose on Tuesday as liquidity tightened because of the approach of a slew of initial public stock offerings.
This helped the yuan finish at 8.0035 to the dollar, up 0.19 percent from Monday's close of 8.0188.
The yuan hit an intraday high of 8.0025 on Tuesday, which is only a whisker away from 7.9972, its highest level since Beijing revalued the currency by 2.1 percent in July last year. It has now appreciated 1.33 percent further since the policy change.
Some dealers believe the yuan is now poised to breach the key 8.0000 level again in coming days. But others, noting its break through that level in May was very brief, expect it to continue to move between 8.0000 and 8.0320, the range of the past month.
Bernanke's comments came after China posted on Monday a record trade surplus of $13 billion in May.
"It's part of the reason for the yuan to rise today, but an increased tolerance on the central bank's part is always the key for the yuan to gain significantly," said a dealer at a major Chinese commercial bank.
Many dealers believe that although the central bank is ready to see increased yuan volatility, it is not prepared to permit an extended period of appreciation for now.
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