Yuan set at strongest rate since 2005, forwards climb

Bloomberg

Fri, Feb 18, 2011 - Page 11

China’s yuan forwards rose for a fourth day as the central bank set the currency’s reference rate at the strongest level since 2005 before a meeting of finance ministers from G20 nations.

The People’s Bank of China set the daily fixing 0.08 percent stronger at 6.5800 per dollar after the US Dollar Index, which tracks the greenback against the currencies of six major trading partners, dropped in the past two days.

China may come under pressure at the G20 in Paris today and tomorrow over its exchange rate, as it’s seen as promoting an imbalance in reserves, a German government official said on Wednesday.

The daily fixing “partly reflects the dollar’s weakness overnight, but is also an attempt to placate foreign critics ahead of the G20 meeting,” said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong. “We expect continued gains later in the week.”

Twelve-month non-deliverable forwards gained 0.05 percent to 6.4245 as of 5:17pm in Hong Kong, reflecting bets the currency will appreciate 2.5 percent in a year from the spot rate. The yuan rose 0.02 percent to 6.5871 per dollar, according to the China Foreign Exchange Trade System. It earlier reached 6.5800, the strongest level since China unified official and market exchange rates at the end of 1993.

US Treasury Secretary Timothy Geithner said China’s inflation rate means that the yuan was -effectively appreciating against the dollar at a rate of “roughly 10 percent a year or more,” in a Senate Finance Committee testimony on Wednesday. He added the Asian nation needs to let the currency keep rising to manage its own economy.

“The comment provides Beijing with a powerful argument to counter accusations of substantial undervaluation of its currency and lowers risks of a trade war,” Kowalczyk said.

The Chinese Ministry of Commerce yesterday said foreign direct investment rose 23.4 percent last month to US$10 billion from a year earlier, adding to record inflows last year that are exacerbating Chinese Premier Wen Jiabao’s (溫家寶) challenge of taming overheating risks.

Consumer prices increased 4.9 percent last month from a year earlier, faster than 4.6 percent the previous month, according to official figures on Tuesday.