The yuan hit a post-revaluation high against the dollar on Wednesday after the Chinese central bank set a much higher reference rate, amid expectations that the large US interest rate cut would add to yuan appreciation.
"The US rate cut leaves little room for the Chinese central bank to raise interest rates again in the near term," said a dealer at a major European bank in Shanghai. "So even quicker yuan appreciation has become nearly the only choice for the central bank to curb inflation."
One-year US dollar LIBOR on Tuesday sank to 102 basis points below the one-year Chinese central bank bill yield, the biggest spread since the yuan's peg to the dollar was abolished in July 2005. As recently as last July, the US rate was 200 bps above the Chinese rate. Allowing the yuan's rate premium to widen too quickly would risk attracting fresh flows of speculative money into China.
The Chinese central bank on Wednesday set the yuan's daily mid-point to the dollar at a post-revaluation high of 7.2350, up 0.28 percent from Tuesday's 7.2556 in one of the biggest daily rises of the reference rate. The yuan closed at 7.2320 against the dollar after hitting an intra-day high of 7.2309, which exceeded the previous post-revaluation peak of 7.2324 touched on January 16. The yuan ended at 7.2392 on Tuesday.