Yuan gains sharply against dollar
Updated: 2008-05-21 13:39

The Chinese currency, the yuan, rose sharply to a fresh high on Wednesday following an overnight fall of the US dollar.

The central parity rate of the Renminbi (RMB) was set at 6.9597 per dollar, up 183 basis points from a day earlier, according to the China Foreign Exchange Trading System.

The currency has risen nearly 5 percent since the beginning of the year, and it was the 36th time that it set a new high against the greenback this year.

The yuan made a breakthrough to the 7-yuan mark against the dollar in early April, and the fast pace of its appreciation has slowed down in the past month as the dollar gradually gained on better-than-expected economic data.

Wednesday's sharp gain of the yuan was buoyed by an overnight fall of the dollar, which fell against most major currencies on Tuesday, hit by US inflation data and talk of higher euro zone interest rates.

The US Labor Department said the producer price index rose 0.2 percent last month after rising 1.1 percent in March. However, core producer prices, which strip out volatile energy and food costs, increased by 0.4 percent, twice the rate forecast on Wall Street.

The report raised investors' concerns about the impact of inflation on consumer spending.

The dollar was also hit by remarks from Wolfgang Franz, president of Germany's ZEW research institute. Franz said the European Central Bank might be forced to tighten credit in the coming months in the face of rising inflation.

The Chinese government may come to rely more on the yuan's appreciation to offset inflationary pressure, faced with a complicated situation of rising inflation, slowing export and the Sichuan quake that caused huge losses, analysts said.

China's central bank has allowed banks in six cities that were hardest hit by the quake to temporarily keep their deposit reserve ratio unchanged, while lenders in other regions must raise the ratio on Tuesday to curb excess liquidity.

Ha Jiming, chief economist with the China International Capital Corporation (CICC) said the appreciation of the yuan would help curb inflation in China but might not be very effective, since the rise of global product prices and US monetary policies also had an effect.

China's consumer price index (CPI), the main inflation indicator, rose 8.5 percent year-on-year in April, compared with 8.3 percent in March and a nearly 12-year-high of 8.7 percent in February.

On Wednesday, the yuan also lost 666 basis points against the euro, 337 basis points against the Japanese yen, and 816 basis points against the British pound, while it strengthened against the Hong Kong dollar by 242 basis points.

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