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RMB Climbs to New High Against the US Dollar
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The exchange rate of the Renminbi against the US dollar climbed a further two basis points to a new high of 7.7613 yuan to one dollar on Friday, according to the Shanghai-based China Foreign Exchange Trading System.

The yuan also gained 82 basis points against the euro and seven basis points against the Japanese yen. But it lost a little ground on the HK dollar, falling 13 basis points.

On Thursday, the RMB broke the 7.77-yuan mark for the first time, ending the day's trading at 7.7615 yuan to the dollar. The rise of 161 basis points was the largest appreciation in a single day since China reformed its exchange rate system in July 2005 to allow the yuan to float against the US dollar within a daily 0.3 percent band from the official central parity rate.

"The sharp increase could have been due to the fact that the Federal Reserve announced it would continue to freeze interest rates and Wednesday's comments by the US Treasury Secretary Henry Paulson that the appreciation of the yuan should be accelerated," said a forex trade dealer with the Bank of China on condition of anonymity.

However, Liu Yuhui, head of the economic evaluation center of the Research Institute of Finance under the Chinese Academy of Social Sciences, disagreed. He believed the proximity of the rapid appreciation to Paulson's comments was mere coincidence.

"The upward trend of the value of the RMB has already taken shape. What happens in the outside world will not affect the overall movement of the local currency," Liu said.

"Since the RMB broke the 8-yuan mark, it has been appreciating in a more active way," Liu added.

Liu pointed out that for a long period of time after the forex reform began, the value of the RMB was raised by the weakening trend of the US dollar. But since the fourth quarter of last year, the RMB's appreciation has often concurred with a stronger US dollar.

"It seems that the forex rate, as an instrument to regulate the macro economy and improve the international balance sheet, is being taken into consideration more often by industry watchdogs," Liu noted.

As dealers anticipate the continuation of the yuan's appreciation, they are more prone to selling US dollars. This in turn helps raise the value of the yuan, market observers say.

However, only when market expectation diverges will the price of a financial product fluctuate by big margins, according to Liu.

"If all dealers expect the RMB to continue appreciating, it wouldn't make sense to allow the local currency to float against the US dollar within a larger daily band," Liu commented.

(Xinhua News Agency February 3, 2007)

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