Strong central bank midpoint pushes China's yuan to record high

Yuan

China's yuan hit a record high versus the dollar for the second straight day in early trade on Tuesday as the central bank set an unexpectedly strong midpoint in a move traders said indicated the government's tolerance of measured yuan appreciation.

Spot yuan touched 6.2004 per dollar in early trade, its highest since the China Foreign Exchange Trade System was established in 1994. It was trading at 6.2014 near midday, still up 0.11 percent from Monday's close of 6.2080.

Before trading began, the People's Bank of China (PBOC) set its daily midpoint up a rare 0.14 percent to an all-time high of 6.2586 from Monday's 6.2674.

"Everybody is puzzled by today's midpoint, which has given rise to speculation on why the PBOC is guiding the yuan to appreciate," said a trader at a European bank in Shanghai.

"But it appears everybody agrees that the government's stance is somehow related to politics."

Traders believe the yuan will breach the 6.20 psychological resistance level in April, the month when the U.S. Treasury will conduct its bi-annual review of the currency practices of U.S. trading partners.

Underscoring the continued economic friction between the world's two largest economies, a bipartisan group of U.S. lawmakers last month reintroduced legislation to pressure China to allow its currency to rise further against the dollar. Similar proposals in recent years have failed to become law.

Many lawmakers assert that China's yuan is undervalued, harming U.S. exporters.

Other yuan traders said the recent strength in midpoints implies that China's new leadership, ushered in last month, may favor a faster pace of yuan appreciation, although still in an officially controlled manner. Such appreciation could be part of reforms to make the yuan more flexible under the capital account.

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