March 20 (Bloomberg) -- China's yuan rose to the highest since a peg to the dollar was scrapped in July, as U.S. senators arrived to press the case for a stronger currency.

``The movements are encouraging,'' Senator Lindsey Graham, said after landing in Beijing. In talks with Chinese officials tomorrow, the Republican from South Carolina said he wants to ``find out why now, why not before, what to expect later.''

Graham and Charles Schumer say China has kept the yuan's value low to give its exports a competitive advantage, contributing to a record $202 billion U.S. trade deficit last year. Even after the biggest advance in eight months last week, the currency has only gained 1 percent since a 2.1 percent revaluation on July 21.

``The diplomatic atmosphere has played a role as it suits Chinese interests to move a little quicker,'' said Simon Flint, head of emerging Asia currency strategy in Singapore at Merrill Lynch & Co. ``The U.S.-China relationship is at risk of deterioration.''

The yuan, a denomination of China's currency, the renminbi, climbed 0.09 percent to 8.0241 against the dollar as of 5:30 p.m. in Shanghai, according to data compiled by Bloomberg. It may strengthen beyond 8 to the dollar this month, Flint said.

Schumer, a Democrat from New York, and Tom Coburn, a Republican from Oklahoma, are accompanying Graham for the five- day trip to assess China's exchange-rate policy.

On March 15 the yuan rose 0.12 percent, the biggest gain since the revaluation. The jump followed Premier Wen Jiabao's comment that the market will play a greater role in setting exchange rates. China said at the time of the revaluation it would let the yuan move as much as 0.3 percent per day.

`Doing Its Best'

``The Chinese's single-most important intention is to avoid tariffs at all possible costs,'' said Boris Schlossberg, senior currency strategist at Forex Capital Markets LLC in New York. ``It's very likely there's going to be continued appreciation in the yuan.''

The government is working to move toward a freely traded currency, Wu Xiaoling, vice governor of the People's Bank of China, told reporters in Beijing on March 18.

``They should understand that China is doing its best,'' Wu said. ``China's economic restructuring needs a process.''

The senators will meet officials in Beijing on March 21-23, in Shanghai on March 23-24, and in Hong Kong on March 25.

What they learn on the trip will determine whether they proceed with a vote on their bill that would apply 27.5 percent tariffs on Chinese imports. A semiannual report due April from the Treasury may accuse China of manipulating its currency.

Manipulator?

``We hope they will not label China as a currency manipulator,'' said Liu Jianchao, a spokesman for China's foreign ministry in Beijing. ``We'll tell them U.S.-China relations are beneficial to both sides.''

Ma Kai, head of the National Development Reform Commission, China's top planning body, on March 17 said there have been two- way movements in the yuan so ``there has been no manipulation.''

The central bank said on Feb. 21 that it aims to deepen reform of the foreign-exchange system as local companies have ``adapted'' to last year's currency changes.

``They are probably 50 percent undervalued, and so moves of 0.1 percent are clearly not going to be enough,'' said Ernest Preeg, the chief economist at the Manufacturers Alliance, an Arlington, Virginia-based trade group representing companies such as Caterpillar Inc. and Motorola Inc. ``There needs to be a major adjustment and pretty much everybody but the Chinese are saying that.''

Shipments abroad helped the Chinese economy double in size in the past decade, leapfrogging the U.K. last quarter to become the world's fourth-largest. China's trade surplus tripled to a record $102 billion last year.

Seeks Speculators

``Previously China had a fixed currency and all speculation was bad,'' said Steven Chang, global markets vice president in Hong Kong at State Street Bank & Trust Co., a unit of the world's biggest provider of investment services to institutions. ``Now they're allowing a lot more volatility and they're wanting more traders and speculators on both sides to trade it.'' Chang says the yuan may advance 3 percent to 5 percent this year.

The peg to the U.S. currency had been in place since 1995. China has said it would allow the yuan to fluctuate versus an unspecified basket of currencies.

``We will further improve the renminbi exchange-rate mechanism, expand the foreign-exchange market and add more flexibility to the exchange rate's trading band,'' China's Premier Wen said at the close of parliament's annual meeting on March 14 in Beijing. He gave no timetable and ruled out a sudden revaluation of the currency.

Exchange-based trading in the yuan ends at 3:30 p.m., while dealing directly between banks continues for two hours. The currency closed at 8.0250 at 5:30 p.m., according to the Web site of the China Foreign Exchange Trade System in Shanghai.

Traders are betting on a 3.9 percent gain in the yuan to 7.7195 in a year, forward contracts showed. Forwards are agreements in which assets are bought and sold at current prices for future delivery.

To contact the reporter on this story: Jake Lee in Hong Kong jlee127@bloomberg.net

Last Updated: March 20, 2006 13:31 EST