'Economic data' propel currency

CHINA'S yuan rose to the highest since its peg to the United States dollar was ended in 2005 on speculation the central bank will allow faster gains to cool the economy.

The yuan is the best performing currency in the past month of the 10 most traded currencies in Asia outside Japan and the Philippines as China seeks to temper inflation at the fastest in 11 years and to reduce a record trade surplus. The currency's gains reflect "economic data," People's Bank of China Governor Zhou Xiaochuan said yesterday in Basel, Switzerland, where he is attending a Group of 10 central bankers.

The surplus, rising prices and Chinese institutions selling currency reserves "may be major factors to the formulation of the exchange rate," Zhou said.

Richard Yetsenga, a currency strategist at HSBC Holdings Plc in Hong Kong, said that "the domestic case for faster currency appreciation has been in place for quite some time."

The yuan gained 0.05 percent to 7.2690 per dollar as of the 5:30pm close in Shanghai, according to the China Foreign Exchange Trade System. The currency earlier touched 7.2630, the strongest since the peg was abandoned. The yuan will rise to 6.86 by the end of the year, said Yetsenga.

Meanwhile a median estimate of 29 analysts surveyed by Bloomberg News sees the yuan rising to 6.88 per US dollar by the end of 2008. Forward contracts show traders are betting on an 8.8-percent advance to 6.6825 in the next 12 months.

"Of course the yuan will strengthen," Simon Grose-Hodge, an investment strategist at LGT Group in Singapore, told Bloomberg News. "But the question is whether you can make any money with what the forward market is already discounting. We think that's very difficult."

The Chinese central bank calculates a daily reference rate for yuan trading by taking a weighted average of quotes from commercial banks designated to act as market makers. The yuan is allowed to trade by up to 0.5 percent against the US dollar either side of that so-called central parity rate, which was fixed at 7.2695 yesterday.