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China's yuan rose against the dollar on Tuesday after the central bank set a stronger reference level for yuan trade, in response to a softening of the US currency globally. However, the yuan came well off its intra-day high, suggesting the market was not in the mood to test the Chinese currency's upside aggressively amid uncertainty over domestic interest rates and US-China trade tensions.
The yuan closed at 7.7315, against Monday's 7.7340 finish, after hitting a high of 7.7280. Dealers said turnover was average and the market was quiet. Before trade began, the central bank set a yuan mid-point of 7.7277 - a post-revaluation high - against Monday's 7.7306, partly because the dollar had weakened on global markets, dealers said.
But they said Beijing was unlikely to let yuan appreciation accelerate, noting a comment late last week by the Foreign Ministry that the Chinese government would not bow to international pressure for a stronger yuan. The US Commerce Department said on Friday it was slapping anti-subsidy duties on imports of glossy paper from China, deploying a new trade weapon.
But the news has had almost no impact on currency trade, beyond making some dealers think Beijing may become more inclined to stabilise the yuan temporarily to show it cannot be bullied.
After four weeks of substantial rises, the one-year Chinese central bank bill yield unexpectedly slipped at Tuesday's auction. This suggested the central bank might be calling a temporary halt to the uptrend in local money rates.
Though short-term moves in money rates have little direct impact on the foreign exchange market because of capital controls, the stabilisation of the one-year yield could mean the central bank has decided not to let the gap with one-year US dollar LIBOR narrow further for now.
Initial resistance for the yuan is believed to lie at its post-revaluation high of 7.7255, hit last Thursday. Good support is expected between its 14-day average, now at 7.7333, and last week's low of 7.7400.

Copyright Reuters, 2007

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