China's yuan rose slightly versus the dollar on Monday. Trade was sluggish before week-long Lunar New Year holidays that will start on Wednesday, but the market still expects fast yuan appreciation in the medium term.
The yuan was trading at 7.1840, up from Friday's close of 7.1890. The central bank fixed the yuan's daily mid-point against the dollar at 7.1923, down slightly from Friday's reference rate of 7.1903, which traders took as a sign that it wanted a stable market before the holiday.
"The yuan should move in a narrow range on Tuesday," said a dealer at a European bank. "But it should remain strong near 7.1800 as the market expects it to continue its recent fast appreciation after Chinese New Year."
Speculation is growing that China may soon have to scale back or suspend its tight monetary policy in the form of interest rate hikes and quantitative measures, given US economic weakness and funding difficulties faced by small Chinese companies. That would leave yuan appreciation as one of Beijing's few options to fight inflation, which the market expects to hit another 11-year high of around 7 percent in January, partly as a result of freakish winter weather in recent weeks.