China's yuan closed sharply higher against the dollar on Tuesday and at its strongest since its 2005 revaluation, after the central bank set a record high mid-point rate for a fifth consecutive session.
Dealers said the rise in the mid-point, a reference rate that sets the parameters for the day's yuan movements, indicated that the central bank may be willing to let the currency rise at a faster pace in the short term. The yuan finished at 7.6175 to the dollar, up from Monday's close of 7.6313. Its previous post-revaluation peak was 7.6218, hit in intraday trading on Monday.
"It's pretty unusual for the central bank to set the mid-point at a record level for several days in a row," said a trader with a major US bank. "It clearly sends out a signal that Beijing is ready to tolerate a speedier appreciation of its currency."
Before trading started, the People's Bank of China set the mid-point at 7.6195, up from Monday's 7.6213. The yuan has gained 0.6 percent in the last seven trading days, translating into an annual appreciation rate well over 10 percent, although dealers do not expect Beijing would allow the yuan to rise at this pace for all of 2007.
The yuan has risen 2.46 percent so far this year and traders are maintaining their forecasts for a roughly 5 percent gain for 2007, up from 3.4 percent in 2006, as China would be unlikely to tolerate a rapid long-term appreciation rate that could hurt its economy.
The yuan is under heavy corrective pressure after its unusually quick rise, but depending on the central bank's intentions, the yuan could still test the psychologically important 7.6000 level as early as next week, dealers said.
China also announced on Tuesday that it would remove or reduce tax rebates on more than 2,000 exported products, including some steel, textiles and manufactured products, to help reduce its trade surplus. One-year offshore non-deliverable forwards (NDFs) quoted the yuan at 7.2800/7.2840, indicating a gain of 4.58 to 4.66 percent in one year's time from Tuesday's mid-point, compared with 4.50 to 4.56 percent on Monday.