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Yuan up 1 pct since revaluation, flexibility seen

Written by: Staff
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SHANGHAI, Mar 17 (Reuters) China showed signs of allowing greater flexibility in its currency on Friday as the yuan appreciated past the 1 per cent threshold for the first time since its July revaluation, ahead of a Beijing trip by two US senators.

The yuan finished at 8.0316 against the dollar, up from Thursday's close of 8.0390, after the central bank set the mid-point of the yuan's exchange rate to the dollar at a strong 8.0286.

At the mid-point level, the yuan would have scored its biggest overnight gain of 0.13 per cent since the revaluation, and would have appreciated 1.01 per cent since Beijing revalued it by 2.1 per cent on July 21 and freed it from a dollar peg to float within managed bands.

''Although the yuan's gains were mostly propelled by market factors, such as the dollar's weakness on global markets, political pressure is also mounting,'' said a dealer at a European bank.

Sen. Charles Schumer, a New York Democrat, and Sen. Lindsey Graham, a South Carolina Republican, will head to Beijing next week to hear firsthand what China is doing about its currency, before making a final decision on a bill threatening the country with a 27.5 per cent tariff on its exports to the United States.

The yuan is under pressure to appreciate further amid claims the currency is so undervalued that it gives Chinese products an unfair advantage in U.S. markets, costing millions of lost American jobs and fuelling a record bilateral trade gap.

Its gains on Friday also came ahead of a visit to the United States in April by China's President, Hu Jintao, during which the U.S. authorities will certainly raise the yuan issue.

On Friday, the dollar hovered near a seven-week low against the euro, staying on the back foot after a soft U.S. inflation report suggested the Federal Reserve's tightening campaign could be drawing to a close.

FRUITS OF LIBERALISAITON The yuan gained 0.24 per cent this week -- a weekly record since the revaluation, topping the former mark of 0.14 per cent set last month and rebounding from an unexpected weakening last week.

Dealers said movements in the yuan's rate were the result of reforms, including a key one introduced in January to let market makers set the yuan's daily opening rate.

The new system allows the yuan to reflect overnight factors in a way that was impossible last year when the opening rate was a carry over of the previous day's close.

''Today's mid-point showed the impact of the dollar fall overnight,'' said economist Song Guoxiang at Galaxy Securities in Beijing. ''It is also a fresh sign that the central bank is ready to allow the yuan to trade in a wider range.'' Since the ground-breaking policy change in July, Beijing has said it will allow the yuan to rise through the Shanghai-based interbank market, ruling out another one-time revaluation.

While market watchers agreed the currency would continue its appreciation on the market in the medium term, they said it would see more volatility in the near term.

Last week, the yuan fell 0.17 per cent between Monday's close and Friday's close, the most significant interruption of the rally following its revaluation.

Dealers said the central bank was keen to create a proper market, in which the yuan could swing in either direction, to prepare firms for possible currency risks along with reforms.

The yuan is allowed to rise or fall only 0.3 per cent from its mid-point each day, but it has moved only a fraction of that range for most trading sessions since the revaluation.

The yuan weakened to 6.8820 against 100 yen from Thursday's 6.8250 and softened to 9.7570 to the euro from 9.6870.

REUTERS SD SSC1454

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