Yuan hits record high against dollar

The yuan closed up against the dollar on Monday,hitting another intraday record high.

The yuan closed up against the dollar on Monday,hitting another intraday record high,after the People8217;s Bank of China raised bank required reserves to mop up liquidity in its financial system and contain high inflation.

The PBOC on Sunday raised the required reserve ratio for banks for the seventh time since last October,to a record high of 20.5 per cent. It has also increased official interest rates four times since then.

Central bank governor Zhou Xiaochuan said over the weekend that China8217;s monetary policy tightening will continue for some time as inflation remains higher than the government is comfortable with,and that the yuan would be one of the tools the PBOC uses in the inflation fight.

Consumer price inflation in March sped to 5.4 per cent from a year earlier,the fastest since July 2008 and topping market forecasts for a 5.2 per cent increase.

The central bank on Monday fixed its yuan mid-point nine pips weaker compared with Friday,letting the currency8217;s steady climb take a breather. But traders said that was likely to be temporary and would not affect the longer-term trend,that China will use the yuan as part of its weaponry to fight inflation.

8220;The PBOC used its fixing today to show a continued gradualism for yuan appreciation,but the trend for the currency to rise is apparently intact,8221; said a dealer at a Chinese bank in Shenzhen.

Spot yuan closed at 6.5287 against the dollar on Monday,up from Friday8217;s close of 6.5325.

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It hit a record high of 6.5276 in intraday trading,having appreciated 4.57 per cent since it was depegged in June 2010,and 0.95 per cent so far this year.

Before trading began,the PBOC fixed the yuan8217;s mid-point at 6.5310,marginally weaker than Friday8217;s historical high of 6.5301. The fixing is used by the PBOC to express the government8217;s intentions for the currency.

The PBOC has engineered a slew of record highs for spot yuan so far this year partly because a weaker dollar helped send global commodity prices surging,boosting imported inflation for China,the world8217;s fastest growing market for staple goods.

Traders said the prospect for the yuan to continue to appreciate at a measured pace remains intact in the medium term,with the benchmark Reuters Jefferies CRB index ,which covers 19 mostly U.S.-traded commodities,having leapt 45 per cent since last June.

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They retained the forecast for the yuan to appreciate 5 to 6 per cent for all 2011,up from 3.6 per cent last year,but expected gains could be more evenly spread over the year as political pressure from the Unites States eases.

Offshore,one-year non-deliverable forwards were bid at 6.3800 in late trade,little changed from 6.3790 at Friday8217;s close. Their implied yuan appreciation in a year8217;s time edged down to 2.36 per cent compared with 2.38 per cent.

Traders said less-than-expected yuan appreciation implied in NDFs this year was partly driven by capital outflows to Hong Kong8217;s expanding offshore yuan business ,leaving a small window open to bet on more yuan strength.