SHANGHAI China's yuan touched a record high versus the dollar on Monday and stayed near that level for much of the day, buoyed by an abundance of dollar supply in the market, traders said.
Spot yuan hit 6.2073 per dollar in late trade, its highest since the China Foreign Exchange Trade System was established in 1994. It closed trading at 6.2080, still firmer than Friday's close of 6.2108.
Before trading began, the People's Bank of China (PBOC) set its daily midpoint at 6.2674, 0.02 percent stronger than Friday and the strongest fix since May 2012.
The central bank's base rate, from which the yuan can fluctuate 1 percent in either direction, is now only 4 pips away from its record high.
"Judging from the PBOC's recent midpoints, the yuan is set to test the 6.20/dollar level soon," said a trader at a major Chinese commercial bank in Shanghai.
"But the central bank is still likely to control the pace of yuan appreciation, in particular China's economy is recovering only in a lacklustre way."
Hot money has been flowing into China this year, driven by large-scale quantitative easing by the U.S. Federal Reserve and other Western central banks since the second half of 2012, while China's healthy trade surplus added dollar supply, traders said.
Market pressure has kept the yuan near the top of its trading band since September, and the PBOC is using relatively weak midpoints to curb excessive appreciation.
Traders said the yuan could test the 6.20 psychological resistance level in April due to political factors. The U.S. Treasury will conduct its bi-annual review of the currency practices of U.S. trading partners this month.
U.S. Secretary of State John Kerry is also expected to travel to East Asia in about two weeks, the first of a parade of senior Washington officials headed toward the region, to discuss issues with Chinese officials, including the yuan.
Underscoring the continued economic friction between Washington and Beijing, a bipartisan group of U.S. lawmakers last month reintroduced legislation to pressure China to allow its currency to rise further against the dollar. Similar proposals in recent years have failed to become law.
Many lawmakers assert that China's yuan is undervalued, harming U.S. exporters.
The onshore spot yuan market at a glance: Item Current Previous Change (pct) PBOC midpoint 6.2674 6.2689 +0.02% Spot yuan 6.2080 6.2108 +0.05% Divergence from midpoint* -0.95% Spot change ytd +0.36% Spot change since 2005 revaluation +33.32% *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
The offshore yuan market at a glance: Instrument Current Difference from onshore (pct) Offshore spot yuan (pct) 6.2030 *0.08% Offshore non-deliverable forwards 6.2955 **-0.45% *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint..
(Editing by Sanjeev Miglani)