Yuan Trades at Post-Peg High on Inflation Concern
China’s yuan rose to the highest level since a dollar peg was ended in July 2005 on speculation the nation is using gains in the currency to cap inflation.
The currency has climbed 0.4 percent in March as the National People’s Congress wraps up its annual meeting tomorrow with inflation standing at an 11-year high. Strength in the yuan lowers import prices and reduces the amount of funds flowing into the economy by pushing up the cost of exports, which governments in the U.S. and Europe have said are undervalued because the currency is kept artificially weak.
“Increasing pressure from trading partners, along with the need to tackle domestic economic problems, will make China increase the pace of yuan appreciation,” said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong. “A stronger yuan will help China curb excess liquidity and ease inflationary pressure.”
The yuan traded at 7.0830 per dollar as of 12:17 p.m. in Shanghai, compared with a close of 7.0894 on March 14, according to China Foreign Exchange Trade System. It touched 7.0815, the strongest since the end of a dollar link in 2005.
U.S. Deputy Treasury Secretary Robert Kimmitt called for faster yuan appreciation at a German Marshall Fund conference in Brussels over the weekend. “The Chinese need to appreciate their currency more quickly,”Kimmit said. “They need to move more quickly to valuing their currency based on underlying market fundamentals.”He made similar comments in an interview with Bloomberg Television on March 11.
Dollar Slump
The dollar fell below 96 yen for the first time in 12 years and dropped to a record versus the euro on speculation the U.S. economy is headed for a recession after JPMorgan Chase & Co. and the New York Federal Reserve bailed out Bear Stearns Cos.
“The yuan will advance faster against the dollar to be consistent with the dollar’s slump against the yen and the euro,”said Zhuang Zhiqiang, a foreign-exchange trader at Xiamen International Bank Co.
The yuan may touch 7.05 this week, he said.
China’s annual inflation rate accelerated to 8.7 percent in February from 7.1 percent in January. The yuan has appreciated 3 percent versus the U.S. currency so far this year.
Bonds Little Changed
Government bonds were little changed on speculation the central bank will act to cool inflation.
“The central bank may raise rates or the required deposit reserve ratio after the NPC this week,”said Zhao Feng, a bond trader with the Industrial Bank Co. in Shanghai. “It used to be the case that new policies would come out after the Congress.”
The People’s Bank of China raised benchmark deposit and lending rates on March 18 last year after the annual legislature meeting. This year’s Congress will end on March 18.
The yield on the treasury note due in February 2023 was little changed at 4.2 percent, according to the China Interbank Bond Market. The price of the 4.16 percent security was 99.54 per 100 yuan face amount.
Tags: central-bank, Fund, inflation