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The yuan closed slightly higher against the dollar in the spot market on Thursday while the non-deliverable forwards market cooled in late trade after having shown rising expectations for long-term yuan appreciation.
One-year dollar/yuan NDFs were quoted at 7.0520/60 late on Thursday after touching an intraday low of 7.0340 percent bid, compared with 7.0410/60 late on Wednesday. The latest NDFs implied yuan appreciation between 6.50 and 6.56 percent in a year's time from Thursday's spot mid-point, down from an intraday high of 6.83 percent - the highest expectation of yuan gains since the currency was revalued in July 2005.
On Wednesday, forwards implied appreciation of 6.69 to 6.77 percent. "The NDFs' recent moves seem to reflect anticipation that the yuan's appreciation may accelerate over the long term," said a dealer at a major Chinese commercial bank.
"But this expectation has now gone too far. Many offshore NDF investors appear to have underestimated how important Chinese policy is in deciding China's exchange rate."
Traders said the NDF market was responding to two factors: euro zone finance ministers' announcement this week that they would make a priority out of pressing Beijing for a stronger yuan, and the rise of Chinese inflation to a 10-year high.
In the spot market, the yuan closed at 7.5057 versus the dollar, up modestly from 7.5115 at Wednesday's close. The central bank set a mid-point of 7.5143 before trade began, up slightly from Wednesday's reference rate of 7.5176.

Copyright Reuters, 2007

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