Yuan ends at high vs dlr on c.bank, reserve hike

The yuan ended at a post-revaluation high against the dollar on Wednesday, after the Chinese central bank signalled a commitment to letting the yuan rise to help fight inflation and announced a hike in banks' reserve ratio in a milder-than-expected tightening move.

The yuan closed at 7.0630 against the dollar, its highest traded level since the Chinese currency was revalued in July 2005 and up 0.26 percent from Tuesday's close of 7.0815.

The central bank set the tone for the rise before trade began when it pegged the daily yuan mid-point at an unexpectedly strong 7.0648 to the dollar, a post-revaluation high for the reference rate and a steep 0.3 percent rise from Tuesday's 7.0870.

"By setting the mid-point at such a high level, the central bank is giving a clear signal that the policy of using yuan appreciation to help fight inflation remains intact," said a dealer at a major Chinese state-owned bank in Shanghai.

After the market closed on Tuesday, the central bank announced a 0.5 percentage point rise in banks' reserve requirement ratio, to a record 15.5 percent.

The hike, effective on March 25, was the first tightening step since last week's news that February consumer inflation soared to an 11-year high of 8.7 percent.

Market watchers said the reserve increase may reduce the possibility of an immediate interest rate hike and push Beijing to rely more on yuan appreciation in its anti-inflation battle.

INFLATION BATTLE

"(The central bank will) continue to allow the yuan to appreciate at a fast pace in the first half of this year," said Lehman Brothers economist Sun Mingchun in a research report.

"We expect the (yuan's) exchange rate against the dollar to reach 6.90 by the end of June. However, we expect the pace of appreciation to slow significantly in the second half as inflation pressure starts to fade and the impact of the global slowdown on China's economy starts to show up," he said.

Speculation has been rampant in the market over the past two weeks about the direction of China's yuan policy in the short term as the central bank slowed the yuan's appreciation during the country's annual parliament session, which ended on Tuesday.

Some believe Beijing may shift to a moderately slower pace of long-term yuan appreciation against the dollar, while using other tools, including interest rate hikes, to help curb inflation.

The central bank also fixed the yuan's mid-point against the euro 0.8 percent higher at 11.0712 on Wednesday, pushing the yuan to close at 11.1209 to the euro , up from 11.1626 at Tuesday's close.

But the yuan has still depreciated 3.8 percent against the euro so far this year. Dealers said China was using yuan depreciation against the euro and other currencies to cushion the impact of the yuan's rise against the dollar on its exports.

One-year dollar/yuan offshore non-deliverable forwards were quoted at 6.2925 in late trade on Wednesday, down slightly from 6.2980 on Tuesday.

But because of Wednesday's sharply stronger yuan mid-point against the dollar, the NDFs' implied 12-month yuan appreciation from the day's mid-point fell to 12.27 percent from 12.53 percent implied late on Tuesday.