The Chinese yuan hit a record high against the dollar Monday, now up 30 percent on the U.S. currency since its landmark revaluation in July 2005, as worries over dollar liquidity eased.
Traders said concerns about a shortage of dollars in the market abated at the end of China's weeklong National Day holiday last week.
The People's Bank of China set a midpoint slightly weaker than its last fixing before the holiday, indicating that the government will manage the exchange rate on its own terms.
During the Chinese holiday, the U.S. Senate delayed a vote on a bill to get tough with China over its currency practices until next week because of a dispute between Republicans and Democrats over the handling of amendments.
China has bitterly criticized the bill targeted at the yuan, warning Washington that its passage could lead to a trade war between the world's two biggest economies.
While the Chinese government paints a picture of resisting U.S. calls for yuan appreciation, it has let the yuan rise -- at China's self-determined pace -- both to help adjust its economic structure to be less reliant on exports and in recognition of the importance of ties between the world's two top economies.
Spot yuan was trading at 6.3556 against the dollar at midday, up from 6.3859 at the close on September 30, the last trading day before the holiday. It has now appreciated 3.68 percent since the start of this year and 7.40 percent since its depegging from the dollar in June 2010.
Since the government allowed the yuan to be revalued by 2.1 percent on July 21, 2005, the Chinese currency has appreciated 30.2 percent, including the revaluation.
On Monday, the PBOC set the mid-point at 6.3586 versus the dollar, slightly weaker than Sept. 30's record high fixing of 6.3549, reflecting the dollar's recent movements and apparently unrelated to the U.S. currency bill on the yuan.
Before the holiday, the yuan hit its lower limit against the PBOC mid-point, driven by pre-holiday dollar demand because banks hoarded some hard currencies for a possible dollar rally during the long break as a sudden surge in the U.S. Dollar Index in September had caught the market unprepared.
With jitters over a dollar liquidity squeeze easing after the holiday, the yuan was catching up with the PBOC's mid-point today, said a trader at a European bank in Shanghai.
Traders see the yuan continuing to rise steadily but slowly in the near term barring another jump in the dollar globally, which could lead to a temporary pause in yuan appreciation.
Offshore, benchmark one-year dollar/yuan non-deliverable forwards NDFs were bid at 6.3620, down sharply from 6.4320 at the close on September 30.
They implied the yuan would be almost unchanged versus the dollar in 12 months compared with a 1.20-percent depreciation they implied at the end of September.
Driven by the dollar index's rally, one-year NDFs suddenly reversed their trend in late September to imply that the yuan would depreciate in 12 months for the first time in 2- years in sharp contrast with mid-August when the benchmark NDFs implied yuan appreciation of as much as 2.22 percent.
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