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- Yuan achieves record against US currency
Date: 26-Nov-2007 Sources: (Xinhua Online)
BEIJING, Nov. 24 -- The yuan broke the 7.4 mark against the US dollar for the first time yesterday largely fueled by expectations that China is seeking a quicker appreciation of the currency to fight inflation.
The value of the US dollar has plunged globally in the midst of America's economic crisis.
The People's Bank of China set the yuan's central parity rate at 7.3992 against the greenback yesterday, a record high since the nation dropped its decade-long link with US dollar in July, 2005.
The central bank made the parity call based on average weighted quotes from 10-plus market makers, indicating the overall market view on the yuan's movement.
The yuan ended at 7.4060 against the US dollar yesterday at the China Foreign Exchange Trade System in Shanghai. The Chinese currency has gained 5.2 percent this year and 10.5 percent since the dollar tie-up was abandoned more than two years ago.
The strength of the yuan hasn't surprised the market, with a steady rise prevailing throughout the week.
'The appreciation was expected amid a squeezed interest-rate spread between the yuan and the US dollar,' said Zhang Huangrui, a Bank of China foreign currency trader.
The Federal Reserve cut its forecast for the US economy in 2008 and markets expect the value of the greenback to continue its downward spiral. 'It is widely expected that the Fed may cut interest rates by 25 basis points in December,' said Zhang. 'In the meantime, the market expects the PBOC to raise interest rates to fight inflation.'
The squeezing of the spread between the yuan and US dollar may attract capital flow into China, he said.
A more valuable yuan will add to the cost for foreign investment in China and help counter investment growth and assets inflation.
China's consumer price index, the main gauge of inflation, rose to 6.5 percent in October year on year, up from 6.2 percent in September. The combined CPI rose 4.4 percent in the first 10 months.
The central bank has forecast the whole-year CPI to top 4.5 percent in 2007. In January, the PBOC set the target for the year at 3.0 percent.
China has already increased its interest rates five times this year, pushing up the one-year benchmark deposit rate to 3.87 percent.
'The interest rate differential with the US is set to be further squeezed, limiting the central bank's ability to use higher domestic rates to moderate growth and liquidity, and piling more pressure on the exchange rate to do the job,' said Standard Chartered Bank in a recent research report.
Economists - including Standard Chartered's Stephen Green and Goldman Sachs' Liang Hong - revised their yuan forecast earlier this month, anticipating quicker gains.
The persistently high trade surplus is also adding pressure for a more valuable yuan.
China's trade surplus topped 27 billion U.S. dollar in October.
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