The Chinese yuan rose 0.1 percent against dollar on Friday as markets speculated that Chinese monetary policy would tighten in view of the rising inflation and the prospect of social unrest.

The rise of yuan was also helped by the Chinese central bank's decision to set the dollar-yuan central parity rate at 6.5671, a few notches below Thursday's 6.5695. This is the currency’s strongest level since July 2005. The Chinese central bank allows the currency to be traded up to 0.5 percent on either side of the official rate.

Chinese prime minister Wen Jiabao had signaled a gradual appreciation of yuan last week. Wen said a steady rise of the currency would help tamp down inflation. Inflation reached 4.9 percent in January on the back of a steady commodities price boom over the past several months.

However, markets are not expecting drastic changes in yuan's exchange rate as it is felt that China may not bank fully on yuan appreciation in its fight against inflation.