The yuan set a new closing high against the dollar on Tuesday as Chinese inflation rose to its highest in 11 years, encouraging expectations that China will have to let the yuan appreciate rapidly this year. Annual consumer price inflation surged to 7.1 percent in January from 6.5 percent in December, the government announced.
The figure was expected, but analysts saw a good chance of further rises in the next couple of months. With the global economy slowing and smaller Chinese companies already suffering from tight domestic monetary policy, it seems inevitable that the central bank will let the yuan appreciate considerably to fight inflation, traders said.
"Today's gain by the yuan reflects market expectations for high inflation. The central bank will stick with its policy of making more use of exchange rates rather than credit tightening to fight inflation," said a dealer at a US bank in Shanghai.
The yuan rose for a fourth straight session to close at 7.1580 versus the dollar on Tuesday after hitting an intraday high of 7.1534, the highest since its July 2005 revaluation. It closed on Monday at 7.1623. Before the market opened, the central bank fixed the yuan's mid-point at 7.1574, up from Monday's 7.1667.
Some dealers also said the yuan was being pushed up by this week's return in force to the market by exporters, some of whom did not immediately resume business as the market reopened last week after long Lunar New Year holidays. In the offshore market, one-year dollar/yuan non-deliverable forwards fell to 6.5520/6.5570 from 6.5760/6.5810 late on Monday.
Their latest levels implied yuan appreciation of 9.16 to 9.24 percent from Tuesday's mid-point over the next 12 months, up from 8.90 to 8.98 percent appreciation implied late on Monday.
One-year dollar/yuan volatilities climbed to 4.50 percent bid early on Tuesday, their highest since the start of this month, but then fell back to 4.45 percent, unchanged from Monday. The recent increase in volatilities apparently reflected uncertainty about how the central bank would resolve the growing contradiction between rising domestic inflation and slower global economic growth.