The yuan ended modestly stronger against the dollar but traded within a relatively thin band on Thursday as the central bank guided it higher and US Treasury Secretary Henry Paulson told Beijing that a stronger yuan would benefit China.
Dealers said the yuan was poised to break 7.0 against the dollar soon as China needed a stronger currency to fight inflation, which continued to hover at a high level in March, while the US economic outlook was cloudy.
"Whether it will rise above 7 is just a matter of time. It could happen around the middle of or late this month, when China announces its March CPI (consumer price index)," said a dealer at a foreign bank in Shanghai.
China's annual CPI rise in February hit a nearly 12-year high of 8.7 percent, partly because of steep increases in international commodity prices. During his visit to Beijing on Wednesday and Thursday, Paulson praised China for letting the yuan rise more quickly, a long-standing demand of the Bush administration.
"Although the process of adjustment is not complete, the accelerated pace of appreciation is significant and welcome, and should continue," Paulson said in a speech to the Chinese Academy of Sciences on Thursday.
A stronger exchange rate would help China to tackle inflation, he said. The yuan, which gained 4.17 percent against the US currency in the first quarter, closed at 7.0158 to the dollar on Thursday, up from Wednesday's close of 7.0184, after touching a high of 7.0135 and a low of 7.0192. Before the market opened for trade on Thursday, the central bank set a stronger daily reference rate at 7.0192, compared with Wednesday's 7.0292.
"The renminbi (yuan) has apparently run into short-term resistance at 7. But in view of its pace of appreciation over the past year, it is set to penetrate that level as early as next week," said a trader at a large Chinese state bank.
The yuan's near-term upward momentum against the dollar was evident in the wide spread between the three-month dollar/yuan forwards, which were trading at 6.8438 late on Thursday, and the six-month forwards at 6.6808, he said.