Yuan closes flat against dollar after rate hike

20 Mar, 2007

The yuan closed flat against the dollar on Monday after hitting a post-revaluation intraday high during the morning, buoyed by the central bank's hike in official interest rates over the weekend.
The Chinese currency touched 7.7330 to the dollar in early trade, its highest since it was revalued and depegged from the dollar in July 2005. It finished at 7.7360, unchanged from Friday's close.
Traders said Saturday's rate increase, China's third in less than a year, made the currency more attractive and raised market expectations for faster appreciation in the short term.
The central bank raised the one-year benchmark yuan deposit rate by 0.27 percentage points to 2.79 percent and the one-year benchmark lending rate by the same amount to 6.39 percent.
"The move gave the yuan a big boost today and could help it stabilise at the 7.7300 level and even challenge new highs in the near term," said a Shenzhen-based trader.
Before trading began in the morning, the central bank set the yuan's daily mid-point against the dollar at 7.7351, its strongest since Beijing revalued the currency in July 2005, a move that took some market players by surprise.
Previously, the bank had typically kept the yuan stable after monetary tightening to deter speculation. Some traders saw the stronger mid-point as a sign that the authorities were prepared to see faster yuan appreciation to cool the economy.
But the rate rise threatens to cut the China-US yield gap to its smallest since the revaluation and that could attract fresh speculative money into China, which the Chinese authorities may try to forestall by keeping a tight rein on the yuan.
One-year non-deliverable forwards quoted the yuan at 7.2950 to 7.3000, indicating appreciation between 5.96 and 6.03 percent in one year from Monday's yuan mid-point. The NDFs showed appreciation of 6.00 to 6.07 percent on Friday.

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