October 15, 2010 / 6:03 AM / 9 years ago

Yuan at fresh high ahead of U.S. currency report

SHANGHAI (Reuters) - Spot yuan hit its highest against the dollar since its landmark revaluation in July 2005 on Friday ahead of the publication of a report by the U.S. Treasury Department on trade partners’ currency practices.

The People’s Bank of China fixed a record high mid-point as the Obama administration is due to say on Friday whether it believes China manipulates its currency to create an unfair trade advantage, a decision that could sour ties between the world’s two biggest economies.

The Treasury Department is required by law to issue twice-yearly reports on the currency practices of the major U.S. trading partners by October 15 and April 15 each year.

The U.S.-China Business Council said on Thursday it had heard from the Obama administration that the latest report would be released on Friday, even though it is often delayed.

Dealers trading on the Chinese market see little chance for the U.S. administration to label China a currency manipulator.

“Although the United States hopes to maximize incentives for China to let the yuan appreciate, the administration is apparently not eyeing a currency war with its crucial trade partner,” said a dealer at a U.S. bank in Shanghai.

Speaking hours before the U.S. report, China’s Ministry of Commerce said the United States should not make the yuan a scapegoat for its own domestic problems.

Ministry spokesman Yao Jian said if the yuan appreciated 3 percent, it will put great pressure on Chinese exporters.

DEPRECIATION VS EURO, YEN

The yuan was at a post-revaluation high of 6.6442 against the dollar in early afternoon trade on Friday, up from Thursday’s close of 6.6508.

Before trading started, the PBOC fixed the mid-point, or its reference rate from which the yuan can rise or fall 0.5 percent in a day, at a record high of 6.6497 from Thursday’s 6.6582.

The yuan has appreciated 2.74 percent since the PBOC announced its depegging to the dollar on June 19, although its rise has still lagged far behind a more than 10 percent plunge in the U.S. dollar index .DXY during the same period.

Since the depegging, the yuan has depreciated 10.3 percent to 9.3320 against the euro by Friday afternoon and has lost 8.51 percent of its value to 8.1656 against the yen.

Dealers said yuan depreciation against the euro could spark fresh currency tensions between China and the European Union in the long run, although China’s trade deficit with Japan may serve as a buffer for such tensions.

For the dollar, many dealers see the yuan rising to about 6.6000 in coming weeks in this leg of appreciation, representing a 3.4 percent gain since the depegging, but they believe the yuan rise will then pause if the dollar stabilizes in global markets.

Dollar/yuan non-deliverable forwards eased to fresh lows to imply more yuan appreciation on Friday, with China-based dealers warning of increasing risks to shorting dollars in the offshore market.

Three-month dollar/yuan NDFs fell to a record low of 6.5490 bid on Friday, implying the yuan will rise another 1.54 percent in the next three months, on top of a 3.54 percent jump implied in the short-term NDFs since the depegging.

One-year NDFs were bid at the highest level since July 2008 at 6.4187 on Friday, implying 12-month yuan appreciation of 3.60 percent on top of a 4.46 percent jump implied in the long-term NDFs since the depegging.

Editing by Ken Wills

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