The yuan closed lower against the dollar on Friday but is set to rise moderately next week after the central bank announced an interest rate hike following the market's close, dealers said. The central bank ordered an increase of 0.27 percentage point in commercial banks' benchmark one-year deposit and lending rates, effective on September 15.
Dealers said that in order to deter speculators, the central bank might well prevent the yuan from rising much if at all on Monday, the first trading day after the rate hike, as it has done after past monetary tightenings.
"Also, the rate hike was widely expected, so the impact will be limited," said a dealer at Chinese commercial bank. But in the wake of the rate hike and this week's news that August inflation jumped to a 10-year high, the market will be looking for a higher yuan and the central bank is likely to accomodate this at least partially next week, traders said.
Several dealers predicted the yuan would rise well beyond 7.5100 next week, though they believe the central bank's guidance will keep 7.5000 as a firm ceiling in the next two weeks.
The yuan closed at 7.5160 to the dollar, down from a 7.5105 close on Thursday, when it hit an intra-day high of 7.5101, its strongest level since its revaluation in July 2005. But the Chinese currency remained well above the mid-point of 7.5222 set by the central bank before trade began on Friday. This was partly because of a massive squeeze in the domestic money market triggered by the record Shanghai IPO of China Construction Bank.
Banks dumped dollars to obtain yuan as China's seven-day bond repurchase rate soared 169 basis points to a multi-year high on Friday. The last day of subscriptions to Construction Bank's IPO is Monday, but the squeeze could persist over the next two weeks because of more IPOs and seasonal demand for funds before China's week-long holiday starting October 1.
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