China's yuan ended stronger against the dollar on Friday but showed little response to mounting pressure from the United States to let the Chinese currency appreciate more quickly. The US Senate Finance Committee voted on Thursday to give the US Treasury Department new tools to pressure countries with "fundamentally misaligned currencies".
The legislation, if enacted, would allow US companies to seek anti-dumping duties on goods from any country that maintains a misaligned exchange rate after being formally cited by the United States. The yuan showed scant reaction to the news as it ended trade at 7.5623 to the dollar, up modestly from Thursday's close at 7.5655.
"I don't think this news will have any real effect on the market, at least in the short term, as it won't go into effect for a while," said a trader at a major international bank. "Plus, a bill like this is not a major surprise as the US has recently been putting more pressure on China to let its currency appreciate."
He continued to believe that the yuan would rise to around 7.55 to the dollar by the end of July and would appreciate by 5 percent for this year. Goldman Sachs in a June research report said that, while the bill was expected to pass the Senate with a veto-proof majority soon, it would not take effect until the fall of 2008 as it had to be taken up by the House of Representatives and the president.
"Also, (currency) intervention may be impossible to implement. The central bank won't be able to easily intervene in a currency that only trades onshore like the CNY, protected by a closed capital account," the report added.
While mounting international pressure appeared unlikely to affect the yuan in the short term, there was a marked rise in one-year non-deliverable forwards (NDFs), whose implied rate of appreciation has risen by almost 1.5 percentage points in the past two weeks.
NDFs quoted the yuan at 7.1400/7.1450, indicating appreciation of 5.94 to 6.02 percent in a year's time from Friday's mid-point, up slightly from Thursday's 5.85 to 5.92 percent and up sharply from about 4.5 percent two weeks ago.
Analysts added that the Senate legislation could backfire, potentially sparking trade friction between the United States and China, depending on US actions once the bill takes effect.
The US Treasury said it could not support the Senate panel's approach and believed that robust dialogue was the best means of achieving progress with China. US Treasury Secretary Henry Paulson will be travelling to Beijing next week to discuss the legislation and yuan flexibility with top Chinese officials. Before the start of Friday's trade, the People's Bank of China fixed its daily yuan mid-point at 7.5697 to the dollar, up from Thursday's low 7.5789.
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