Yuan rises to 7.01 against US dollar

Updated: 2008-03-27 10:44

The yuan rose to the strongest since the dollar peg was scrapped in 2005, as authorities seek a stronger currency to curb inflation and lower foreign currency reserve build-up.

The People's Bank of China, the central bank, set the central parity trading rate at 7.0130 yuan against the greenback, from Wednesday's 7.0252. The yuan has gained 3.7 percent against the dollar since the beginning of 2008.

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Analysts say it won't be many days before one US dollar trades less than 7 yuan, a new milestone since China scraped a fixed exchange rate system in July 2005.

Economists and policy-makers believe that a stronger yuan will help reduce the country's massive trade surplus, mop up excessive liquidity on the market, and effectively curb domestic inflation, which rose to a 11-year high of 8.7 percent in February.

"The need to ease inflation and cut the trade surplus keeps pushing up the yuan,'' Hao Shufei, a foreign- exchange trader at the Chinese unit of ABN Amro Bank NV in Shanghai, was quoted as saying by the Bloomberg.

The yuan, which advanced 7 percent against the greenback in 2007, gained the most in a week.

The recent quickening appreciation of the yuan seemingly underscores the Chinese government's determination to rein in big domestic prices rises. Some analysts said that Beijing has resorted to two-pronged approaches to fight inflation: rapid yuan revaluation and rein-in of liquidity on the money market.

The central bank ordered the reserve ratio that commercial banks are required to deposit in the central bank, be raised to 15.5 percent, effective from March 25. The measure is expected to recover 210 billion yuan from the market.

Others say that the latest acceleration in the rise of the yuan might be the beginning of China's efforts to narrow the trade imbalance while better meeting domestic consumption with more imports.

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