The yuan rose against the dollar on Thursday, hitting its highest level since the July 2005 revaluation and approaching the rate at which the central bank conducted its first dollar-yuan swap deal a year ago.
Last November 25, the central bank did a landmark $6 billion swap with 10 domestic banks, selling dollars at around 8.0810 yuan and undertaking to buy them back a year later at 7.85, according to market sources.
The central bank appears to want the yuan spot rate to be very near 7.85 when the swap matures this weekend - a move that could prevent either side of the transaction from facing a significant notional loss, dealers said. The US dollar's softness globally is facilitating the move.
"It's coincident with both global market conditions and the central bank's own need," said a dealer at a major Chinese commercial bank. The dollar's weakness in global markets overnight allowed the central bank to set the yuan's daily mid-point at a record high of 7.8596 on Thursday morning, up from Wednesday's 7.8655.
The yuan hit an intra-day high of 7.8575. It was trading at 7.8589, up from Wednesday's finish of 7.8647. Most trades on Thursday were conducted above the psychologically important 7.8600 level. Some dealers said the yuan could come very close to 7.8500 on Friday and if this level were breached by the end of next week, the yuan could rise as high as 7.80 by the end of the year.
The yuan resumed its uptrend this week after falling every day last week when the central bank intervened against it, apparently seeking to correct excessive expectations for appreciation, dealers said. One-year offshore NDFs quoted the yuan at 7.5590/7.5620 to the dollar, forecasting a yuan rise of between 3.94 and 3.98 percent from Thursday's mid-point. That was up from 3.86 and 3.93 percent on Wednesday.
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