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The yuan rose against the dollar late on Tuesday in both the spot and offshore non-deliverable forwards markets on bets the currency may rise after the annual parliament session, although many in the market believe policy-makers may slow the long-term pace of appreciation.
The spot yuan recovered from initial weakness to hit an intraday high of 7.0814 to the dollar in the final minutes of trade, its highest since Beijing revalued the Chinese currency in July 2005. It closed just one pip off the high at 7.0815.
"Some banks are betting on the possibility of another leg up in the yuan after China's annual parliament session ended today," said a European bank dealer in Shanghai. "The yuan's mid-point over the next three days should give a hint on policy in the near term."
Offshore non-deliverable forwards (NDFs) resumed falling after a short-lived rebound on Friday and Monday. The drop, which implies greater expectations of yuan appreciation in the long term, led some onshore dealers to suspect there may be a liquidity shortfall in Asian markets. The spot yuan rate had traded as low as 7.0871 to the dollar on Tuesday, down from Monday's close of 7.0830, after the central bank set Tuesday's mid-point at 7.0870, down from the previous day's post-revaluation high of 7.0815.
Speculation has been rampant in the market over the past two weeks about the direction of China's yuan policy. Some believe Beijing may shift to a moderately slower pace of long-term yuan appreciation against the dollar, while using other tools, including interest rate hikes, to help curb inflation.

Copyright Reuters, 2008

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