Jan. 3 (Bloomberg) -- The Chinese yuan rose to the strongest since a link to the dollar was scrapped in July 2005 on concern the U.S. economy is losing momentum.

The yuan was the best performer against the dollar today of the 10 most-active Asian currencies after a report yesterday showed manufacturing in the U.S. shrank the most in almost five years. The report led traders to raise bets the Federal Reserve will cut interest rates again this month to avoid a recession.

``The reports from the U.S. really disappointed and the yuan is gaining on the back of that,'' said Magnus Prim, chief foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``I expect the pace of yuan appreciation to quicken this year.''

The yuan rose 0.29 percent to 7.2725 per dollar as of the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The currency reached 7.2721, the strongest since the peg ended.

The yuan strengthened 7 percent last year as policy makers sought to curb inflation at an 11-year high and reduce a record trade surplus.

China's central bank has also allowed a faster appreciation in the currency to appease U.S. and European officials who blame a weak yuan for global trade imbalances. The currency took two months to advance from 7.6 to 7.5, while taking one month to gain from 7.5 to 7.4. Yesterday, the yuan passed 7.3 per dollar for the first time since the end of the peg.

`Excess' Appreciation

China needs to let the yuan strengthen at a faster pace this year while preventing ``excess'' appreciation to avoid an abrupt narrowing of its trade surplus, China Securities Journal reported yesterday, citing Yu Yongding, an economist with the Chinese Academy of Social Sciences and a former monetary-policy adviser to the central bank.

The inflation rate may accelerate in 2008, partly due to higher grain and metal prices worldwide, Yu said, according to the newspaper.

The central bank reiterated its commitment to maintain a ``tight'' monetary policy this year, with Governor Zhou Xiaochuan pledging Dec. 29 to further control liquidity and improve the currency exchange mechanism to ``adjust overall demand and improve the balance of international payments.''

The yuan will rise to 6.86 per dollar by the end of 2008, according to the median estimate of 29 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on an 8.8 percent advance to 6.6825 in the next 12 months.

Government bonds were little changed. The yield on the 2.93 percent bond due February 2014 held at 3.13 percent, according to the China Interbank Bond Market. The price was 98.93 per 100 yuan face amount.

The central bank calculates a daily reference rate for the yuan by taking a weighted average of quotes from commercial banks designated to act as market makers in the currency. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of that so-called central parity rate, which was fixed at 7.2775 per dollar today.

To contact the reporter on this story: Aaron Pan in Hong Kong at Apan8@bloomberg.net.

Last Updated: January 3, 2008 05:01 EST