China's yuan hit a fresh post-revaluation high against the dollar on Friday and closed above its mid-point for the first time in a week, suggesting the market was becoming used to a faster pace of appreciation.
The yuan ended at 7.3041, up from Thursday's close of 7.3175, after hitting a high of 7.3015. It climbed 0.90 percent during the week, its biggest weekly gain since it was revalued and its peg to the dollar was abolished in July 2005.
Faced with rising inflation and diplomatic pressure from China's trading partners, the Chinese central bank allowed its tightly controlled currency to appreciate 6.86 percent this year, accelerating from 3.40 percent in 2006 and 2.56 percent in 2005.
Friday's rise was caused partly by a sharp fall of the dollar in global markets.
But the central bank encouraged the yuan's record gain throughout this week by setting a string of strong mid-points, or reference rates. On Friday it announced a mid-point of 7.3046, up from Thursday's 7.3079.
Traders and analysts believe the central bank is using the mid-points to prepare the market for faster yuan appreciation next year, as it fights inflation.
It may also want to see greater daily volatility, to encourage traders to bet on intra-day moves in both directions instead of assuming the yuan will drift continuously higher. That could make it easier for the central bank to manage faster appreciation.
The yuan mostly traded well below each day's mid-point this week, showing many traders feared a pull-back. But on Friday it stayed slightly above the mid-point for most of the day.
"The recent acceleration of yuan appreciation indicates the central bank is now seriously implementing its new policy of using the exchange rate to fight inflation," said a dealer at a major Chinese commercial bank.
"International pressure is also giving the central bank little choice but to let the yuan rise faster."
Some traders speculate that authorities may soon widen the yuan's daily trading band, which now extends 0.5 percent on either side of the mid-point, or even announce another one-off revaluation. But many analysts think China remains unlikely to take the drastic and risky step of a revaluation.
Dealers agreed that this week's pace of appreciation could not be sustained in the long term. They expect the yuan to rise around 8.5 percent or slightly more against the dollar over the next 12 months.
"The rush by the central bank to allow the yuan to appreciate at a much faster pace at the end of this year is partly to make the headline figures look better," said a trader at a US bank in Shanghai.
"China can proudly say it is serious about currency reforms. But I simply don't believe the yuan will rise at this annualised pace next year, so the recent faster-than-usual rise may mean a pull-back or a slower uptrend at the start of next year."
Asked about the yuan's rise, a Chinese central bank official, who declined to be named, told Reuters on Friday: "We will continue to push forward with reform of the foreign exchange system in a stable way."
He added, "If we don't announce new policies, that means we are not adjusting our policy."
The remarks were in line with previous official statements on the currency. In its November monetary policy report, the central bank said explicitly for the first time that it would use the exchange rate to fight inflation, which hit an 11-year high that month.
In the offshore non-deliverable forwards market, one-year dollar/yuan NDFs fell to 6.7161/6.7236 on Friday from 6.7310/80 late on Thursday. Their latest levels implied yuan appreciation of 8.64-8.76 percent over the next 12 months from Friday's mid-point.