Yuan hits new high

The yuan hit a new post-revaluation high against the dollar for the third straight day in volatile trade on Tuesday after the central bank again set a strong mid-point for the Chinese currency. Before trading began, the People's Bank of China fixed the yuan's daily reference rate at a post-revaluation high for the second straight day.
The new mid-point was set at 7.3261, up from Monday's 7.3315. The mid-point's rise on Tuesday was moderate, but its jump of 0.35 percent on Monday was the second biggest since the yuan was revalued in July 2005. Monday's mid-point meant the day's trading band - 0.5 percent on either side of the reference rate - did not contain the previous day's close, an extremely rare event.
Analysts said the strong mid-points, which were set despite the dollar's firmness in overseas markets, appeared designed to signal the market that it should expect both faster yuan appreciation and greater volatility next year.
"By setting the mid-point at record highs in the last trading week of year, the central bank is preparing the market for bigger moves in 2008," said Cheng Manjiang, economist at Bank of China International.
After opening at a fresh post-revaluation high of 7.3375 on Tuesday, the yuan immediately retreated, hitting a low of 7.3591. It was at 7.3444 just after midday, up slightly from Monday's close of 7.3475.
"The market was a bit taken aback by the strong fixings. Trading was slow in the morning as dealers were trying to figure out the central bank's intentions," said a Shenzhen-based dealer at a Chinese bank.
The Chinese central bank said explicitly for the first time in November that it would use the exchange rate as a tool to curb inflation, which surged to an 11-year high in November.
"The central bank meant what it said. There could be a further widening of the yuan's trading band, and I wouldn't even rule out another one-time revaluation," Cheng said, though many analysts think China is likely to avoid the drastic and risky step of another sudden revaluation.
Traders said the yuan would have risen more on Tuesday if it were not for seasonal dollar demand from foreign firms in China, which are remitting profits abroad as the year-end nears.
Offshore, one-year dollar/yuan non-deliverable forwards edged down to 6.7526/6.7626 by midday from Monday's 6.7565/6.7665. The latest NDF levels imply yuan appreciation of 8.33-8.49 percent in 12 months from Tuesday's mid-point, almost unchanged from Monday.