China's yuan closed slightly weaker against the dollar on Wednesday, relinquishing gains after hitting an intraday post-revaluation high for a sixth session in a row as dealers predicted a near-term correction.
The People's Bank of China has been spurring a pick-up in the yuan's appreciation since early last week by repeatedly fixing its daily mid-point, a reference rate that sets the parameters for the yuan's movements, at post-revaluation highs.
But dealers viewed the rally as a short-term event engineered by the central bank in part to boost volatility in the market, rather than a long-term policy shift by Beijing. The yuan hit an intraday high of 7.6155 to the dollar on Wednesday, its strongest since Beijing revalued the currency and depegged it from the dollar in July 2005.
It later retreated to finish at 7.6180, barely weaker than Tuesday's close of 7.6175, indicating the yuan was under heavy pressure to correct after its unusually quick rise.
Before trading started on Wednesday, the central bank fixed the yuan's daily mid-point at 7.6180, a post-revaluation high for a sixth straight session. The repeated record highs raised questions about whether China was ready to change its currency policy to allow the yuan to appreciate more quickly, particularly given increased domestic and international pressure to do so, dealers said. "But recent central bank statements and technical analysis indicate no change in China's long-term currency policy, despite the yuan's faster appreciation over the past week or so," said a dealer at a Chinese commercial bank.
The central bank stated on Wednesday that any large fluctuations in China's currency would be harmful to its economy and to others around the world, although currency adjustments could play a role in addressing external imbalances.
The statement was in response to the International Monetary Fund's approval on Monday of changes that will sharpen its monitoring of member countries' foreign exchange policies.
The yuan has gained 0.59 percent in the last eight trading days, translating into an annual appreciation rate well over 10 percent, although dealers doubt that Beijing would allow the yuan to rise at that pace for all of 2007.
The recent rally came after China reported an unexpectedly large trade surplus for May and several US senators unveiled a trade bill to push China to let the yuan rise faster. But traders noted the rally also came after the central bank had surprised the market by pushing the yuan down 0.44 percent from June 6 to 11, when the US dollar was fluctuating sharply against major global currencies such as the yen and the euro. "The yuan's gain since last week is actually very small due to its earlier loss," said a Shanghai dealer at a European bank. "If you adjust the gain based on the dollar's recent movements against a basket of global currencies, the change in the yuan's exchange rate is even smaller."
In the year-to-date the yuan has only risen 2.46 percent, for an annual appreciation rate of roughly 5 percent - in line with many dealers' expectations for 2007. The yuan rose 3.4 percent in 2006. One-year offshore non-deliverable forwards (NDFs) quoted the yuan at 7.2780/7.2810 at 0930 GMT, indicating a gain of 4.63 to 4.67 percent in one year's time from Wednesday's mid-point, little changed from 4.58 to 4.66 percent on Tuesday.