SHANGHAI China's yuan closed a whisker away from a record high after firming for a sixth straight session on Monday, and it would have gained more if hadn't been restricted by the official daily trading range, as Chinese firms struggled to reduce long dollar positions.
All but a handful of trades occurred at 6.2255 versus the dollar, the strongest level permitted by the daily trading range set by the central bank.
Closing on the limit, it was just shy of the yuan's record high of 6.2252 struck on November 14. On Friday, the yuan had closed at 6.2285.
The yuan has hit repeated highs against the dollar since late September, fuelled partly by speculation that the central bank would finally relent to let the yuan appreciate more.
The central bank set its midpoint at 6.2884 to the dollar, slightly firmer than Friday's fix of 6.2906. The exchange rate can rise or fall 1 percent from the mid-point set by the central bank each day.
The People's Bank of China (PBOC) followed its usual pattern of fixing the yuan stronger in response to a fall in the dollar in global markets overnight.
Upward pressure on the yuan in the last four months has come from the unwinding of long dollar positions accumulated in the first seven months of this year, when the yuan depreciated severely, reaching a year low of 6.3967 on July 25.
Traders say that fundamental pressure is being amplified by herd behavior. With the strengthening trend now apparently entrenched, dealers are fearful of swimming against the tide.
"Part of it is the long dollar positions, but another factor is that the market is now in a bit of a panicked mood," said a trader at a joint-stock bank in Shanghai.
The relative stability of the midpoint in the face of market forces pushing for appreciation indicates that the central bank is determined to limit the pace of the yuan's rise, analysts said.
Traders say the yuan will likely continue to chafe against its daily limit in the near term unless the PBOC acts decisively.
That could occur either by releasing more yuan liquidity into the market -- effectively intervening to curb the yuan's rise -- or else setting the midpoint stronger, thereby granting more space for the currency to strengthen.
(Editing by Jacqueline Wong)