Yuan rises to 5-year high against USD

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The yuan rose to its highest level against the U.S. dollar in five years on Tuesday after China's central bank vowed to make the currency regime more flexible.

The central parity level for the RMB against the U.S. dollar climbed to 6.7980 Tuesday, 0.43 percent higher than the 6.8275 Monday, the highest since China unpegged the yuan from the U.S. dollar in July 2005, according to the China Foreign Exchange Trading System.

The yuan fell to 8.3816 against the Euro from Monday's 8.4825.

Finance professor at Renmin University Zhao Xijun said the breakthrough reflected the progression of the exchange rate reforms referencing a basket of currencies and based on market demand and supply.

China's central bank announced over the weekend it will push forward reform of the Renminbi exchange rate but ruled out a one-off revaluation.

At Monday's opening, the yuan was unchanged against the U.S. dollar from the previous trading day. But the spot price rose by nearly 0.45 percent, almost hitting its daily limit of 0.5 percent.

By Monday's close, the yuan had risen to 6.7976 to the U.S. dollar on the spot inquiry offer, the highest since July 2005, indicating investors are betting on a stronger yuan.

Tuesday's central parity rate at the opening was close to that level, suggesting authorities considered the market when fixing the price.

Liu Yuhui, a researcher with the Chinese Academy of Social Sciences, said investors are pinning their hopes on a stronger yuan, which may push the yuan to appreciate in the near term.

The central bank reiterated Sunday that it will manage the rate dynamically and adjust the rate so it stays within the daily fluctuation band to avoid big swings and any "overshooting."

Zhao Xijun said speculation can only impact the market in the short-term. In a long-run, it is difficult to predict as the market faces uncertainties. He said he expects the value of the yuan to "move in both directions."

China moved to a managed floating exchange rate regime in July 2005based on market supply and demand and referencing a basket of currencies.

The reform of the RMB exchange rate has made continuous progress since then, produced the anticipated results and played a positive role, a central bank spokesperson said.

After the global financial crisis worsened in 2008, China narrowed the fluctuations of the RMB exchange rate to stabilize market sentiment and stimulate economic growth amid the crisis.

"The stability of the RMB exchange rate played an important role in mitigating the crisis's impact, contributing significantly to the Asian and global recovery, demonstrating Chinese efforts to promote global rebalancing," the spokesperson said.

Zhou Xiaochuan, governor of the central bank, said in March the exchange rate policy China took during the crisis was a part of the government's stimulus package that would end "sooner or later" along with the other measures.

China's economy expanded 11.9 percent year on year in the first quarter of the year and exports surged 48.5 percent in May as United States and European Union demand rebounded.

The central bank spokesperson said the gradual recovery of the global economy and an upturn in the Chinese economy consolidated with enhanced economic stability, adding that it is desirable to further proceed with reform of the RMB exchange rate regime and increase RMB exchange rate flexibility.

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