China's yuan stayed near its highest level against the dollar since its 2005 revaluation on Tuesday amid expectations that the central bank would allow the currency to rise at a faster pace for the rest of this year.
In contrast to Monday's strong gain, however, the yuan traded narrowly on Tuesday. The central bank appeared to use designated primary dealers in the currency market to keep trade stable, dealers said.
The yuan was at 7.9660, marginally down from Monday's close of 7.9656. The central bank set the yuan's daily mid-point on Tuesday morning at 7.9672, its highest level since the yuan was revalued by 2.1 percent and depegged from the dollar in July 2005.
"Most domestic and foreign banks have shown increased interest in retaining yuan positions after last week's interest rate hike, helping the yuan stay at high levels on Tuesday," said a dealer at a European bank. "But some large-sized deals at $100 million seem to confirm that the PBOC will continue controlling the pace of the yuan's appreciation."
The yuan, which has now appreciated a further 1.81 percent against the dollar since the depegging, is set to challenge the next psychological resistance of 7.9550 in days or weeks, depending on the central bank's attitude, dealers said.
The currency hit a post-depegging high of 7.9640 on Monday after the central bank announced on Friday that it was raising commercial banks' one-year deposit and lending rates by 0.27 percentage point.
"A faster (yuan) appreciation is expected to play a more prominent role in the conduct of monetary policy, especially given the authorities' revealed preference for market and price-based policy measures" such as the rate hike, said Qing Wang at Bank of America in a research note.
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