The yuan closed on Wednesday at its highest level since the July 2005 revaluation as dealers said the market believed the central bank was encouraging a slightly faster pace of yuan appreciation.
The yuan closed at 7.8661 to the dollar, up from 7.8745 at the close on Tuesday, marking its highest level since Beijing scrapped its peg to the dollar and revalued the yuan by 2.1 percent in July 2005. Its previous trading high was 7.8706, reached in intraday trading last Friday.
"The market was encouraged by an unexpected strong mid-point today," said a Shanghai dealer at a European bank. "Technically, the yuan has not seen a decent correction since mid-September, a strong sign that the central bank is allowing it to rise faster."
The People's Bank of China set the yuan's mid-point to the dollar at a post-revaluation high of 7.8719 on Wednesday morning. The mid-point is seen as an instrument by the central bank to express its intention to the market on the yuan's exchange rate.
Late on Wednesday afternoon, China posted a record trade surplus of $23.8 billion in October, easily beating forecasts. After tripling in 2005, the trade surplus is now on course to expand 60 percent in 2006, to around $160 billion.
Dealers said the yuan was likely to continue a quickened pace of gains for the rest of this year, possibly breaking through another psychologically important level at 7.8600 this week, but they warned of over-optimism over the currency's long-term trend. Central bank adviser Fan Gang said on Monday the yuan could appreciate on average by 5 percent, but a more dramatic rise would be catastrophic for Chinese growth and employment.
The dollar held steady near six-week lows against the euro as investors took the view no major US policy shift was likely after the Democrats took control of the House of Representatives in the midterm elections.
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