China's yuan hits record high as Oct holiday approaches
* Rises on strong corporate demand for yuan
* Banks avoid carrying long positions over holiday
By Gabriel Wildau
SHANGHAI, Sept 28 (Reuters) - China's yuan rose on Friday to its strongest level on record, as traders reported strong corporate demand for yuan and banks moved to avoid carrying short yuan positions over the upcoming week-long holiday.
At its strongest point, the yuan was 0.9 percent firmer than the central bank's midpoint, the widest strong-side distance from the fix since the trading band was widened to 1 percent from 0.5 percent in April.
"Today the important factor has been customer demand, because accumulated foreign exchange settlement was relatively high. There was no demand for dollars, so the market (for dollars) plunged," said a dealer at a city commercial bank in Shanghai.
Another source of upward pressure on the yuan this week has been banks' desire to avoid carrying short yuan positions through the week-long holiday that kicks off with the Mid-Autumn Festival this weekend.
Carrying such a position would be expensive because it would require borrowing yuan in the forex swap market. Such swaps are currently expensive due to tight yuan liquidity in the domestic money market.
The cost of carry would also be heightened by the length of the holiday as the swap would be needed for a longer duration.
Spot yuan hit 6.2856 per dollar shortly after 3 pm (0700 GMT), 169 pips stronger than Thursday's close and 84 pips above its midday level of around 6.2940. The previous all-time high of 6.2884 occurred in February.
The yuan has strengthened consistently since hitting a 2012 intraday low of 6.3967 on July 25, supported by the dollar's retreat in global markets and, more recently, the launch of the Federal Reserve's latest round of quantitative easing. At that level, the yuan was down 1.6 percent for the year.
The currency is set to post its biggest monthly gain of the year in September.
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