China's currency, the yuan, rose to a record high against the U.S. dollar on Friday, sparking concerns about this year's outlook for the currency's appreciation.
The yuan strengthened by 72 basis points Friday to reach an all-time high of 6.2937 against the U.S. dollar, according to the China Foreign Exchange Trading System.
It marked the first time for the currency to dip below 6.30 since China's central bank announced on June 19, 2010 that it would reform the way in which the yuan's exchange rate is formed to improve its flexibility. The yuan appreciated by 7.82 percent during the period.
The central parity rate set on Friday also indicated a value increase of 22.4 percent against the greenback since China launched exchange reforms on July 21, 2005, when the country abandoned a decade-old peg to the U.S. dollar by allowing its currency to fluctuate against a basket of currencies.
The exchange rate was 8.11 yuan per U.S. dollar when the reforms were launched.
Analysts say the recent gains of the yuan versus the U.S. dollar were due to both internal and external factors.
"Economic data for December and January has been better than expected, which has eased concerns of a hard landing for the Chinese economy. Stable economic growth has created conditions for the yuan's rise," said Liu Dongliang, a senior finance analyst with the China Merchants Bank.
On Thursday, the European Central Bank decided to keep its key interest rate unchanged at 1 percent, erasing uncertainties about its monetary policy. The Bank of England said the central bank will buy an additional 50 billion pounds in assets, mostly British government bonds, in an effort to ease credit and boost the economy.
On the same day, Greek political leaders reached a deal over austerity measures in order to prevent a debt default. Analysts say all of these factors pointed to the downward movement of the dollar.
In December, the yuan continued falling toward the bottom of its official trading band against the U.S. dollar for 12 consecutive trading days, indicating volatility based on investors' choice of currencies.
However, during the period, the central parity rate of the yuan still strengthened by 166 basis points against the dollar.
In China's foreign exchange spot market, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day.
The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices before the opening of the market each business day.
In 2011, the yuan appreciated 5.1 percent against the dollar. Analysts expect the yuan to appreciate by 3 percent this year. Meanwhile, bi-directional movement by the yuan will become more apparent, an official with the State Administration of Foreign Exchange said.
"There is already no room left for large-scale appreciation of the yuan. Bi-directional fluctuations will strengthen," Liu said.