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China's yuan hit a fresh post-revaluation high against the dollar for the second straight day on Friday, as the dollar continued its slip globally, triggered by expectations that the Federal Reserve would put US interest rates on hold in the near future.
In a policy meeting earlier this week, the Fed kept interest rates unchanged and made no changes to its outlook for more moderate growth and inflation. That had forced investors to rethink the path of US monetary policy and trimmed their dollar holdings, which in turn gave a major boost to major global currencies, including the yuan.
At one point, the Chinese currency climbed as high as 7.8870 against the dollar, breaking the psychologically important level of 7.8900 for the first time since Beijing revalued the yuan by 2.1 percent and depegged it from the US currency in July 2005.
The previous intraday high was 7.8935, hit on Thursday. "A weak dollar played a key role to push up the yuan to the new high," said a Shanghai dealer at an American bank.
"Demand for the yuan was also particularly strong for most of the day, with several major Chinese banks placing big orders." The Chinese currency traded at 7.8896 to the dollar, having appreciated a further 2.79 percent since its revaluation.
Some dealers and economists predict the yuan will rise to 7.80 before the end of this year, and others expect it to rise above the 7.70 level or even higher.
Traders said on Thursday that China had ordered domestic banks not to quote prices for offshore non-deliverable yuan forward contracts, in a move apparently designed to prevent banks from risking losses in that market, and to protect Chinese authorities' ability to control yuan exchange rates.
But the restriction will not have a significant impact on the spot yuan market, which was already tightly regulated by the central bank, they said. In late trade, one-year onshore yuan/dollar swaps were quoted at between 2,040 and 2,090 pips, suggesting the yuan will be up 2.66 to 2.72 percent in a year's time against its mid-point on Friday, according to the China Foreign Exchange Trade System.

Copyright Reuters, 2006

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