Chinese yuan advances to strongest since 2005

The yuan rose to the strongest since a peg to the dollar was scrapped in July 2005, after the central bank reiterated its pledge to maintain a "tight" monetary policy this year.

The currency made its biggest three-day gain since the end of the dollar link, after advancing 7 percent in 2007, double the pace of the previous year. The central bank will further control liquidity and improve the currency exchange mechanism in 2008 to "adjust overall demand and improve the balance of international payments," Governor Zhou Xiaochuan said in a New Year's message on the bank's Web site on Dec. 29.

The yuan's appreciation "is likely to continue this year" as a response to "both domestic and external pressure," said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. The Chinese government needs "to be more aggressive on monetary tightening" to address "the rising inflationary pressure and the risk of overheating," Huang said.

The yuan rose 0.15 percent to 7.2934 per dollar as of 5:30 p.m. in Shanghai Wednesday, according to the China Foreign Exchange Trade System. It touched 7.2930 per dollar, the strongest since the end of a dollar peg. The currency gained last year as the country's policy makers sought to curb inflation and reduce a record trade surplus. "The appreciation will be faster in the first half of this year and slow toward the end of 2008," said Nizam Idris, a currency strategist at UBS AG in Singapore. "We don't think China is looking to slow the economy down but it needs to tighten monetary policy to curb inflation."