Yuan Strengthens to 17-Year High on Fed Rate Pledge, Faster Inflation Data

The yuan rose to a 17-year high after the Federal Reserve pledged to keep interest rates at a record low and on speculation China’s central bank will allow appreciation to temper inflation.

The currency strengthened the most in almost two months after the Fed said yesterday it will hold the target rate near zero for at least two years and use other policy tools “as appropriate.” Yuan forward contracts posted the largest gain since October after China reported its trade surplus surged to the highest level in more than two years due to record exports. Consumer prices climbed 6.5 percent last month, the fastest pace in three years, the statistics bureau said yesterday.

“The Fed pledge and concerns over the U.S. recovery mean the dollar will face more pressure,” said Kenix Lai, senior market analyst at Bank of East Asia in Hong Kong. “China’s inflation data suggests the country will appreciate the currency more. Yuan appreciation is a better choice because it’s more difficult to raise interest rates or banks’ reserve ratios with all the uncertainties in the global market.”

The yuan rose 0.19 percent to close at 6.4181 per dollar as of 4:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.4120 earlier, the strongest level since the country unified official and market exchange rates at the end of 1993.

Exports, Surplus

The People’s Bank of China set its daily yuan fixing 0.26 percent higher at 6.4167, the biggest increase since November. The yuan is allowed to trade up to 0.5 percent on either side of the official rate.

In Hong Kong’s offshore market, the yuan rose 0.36 percent to 6.4120. Twelve-month non-deliverable forwards jumped 0.7 percent to 6.3580. The contracts were at a 1 percent premium to the onshore spot rate, based on data compiled by Bloomberg.

China’s outbound shipments climbed 20.4 percent from a year earlier in July, compared with the 17 percent median forecast in a Bloomberg News survey of 25 economists. Imports jumped 22.9 percent, the customs bureau said on its website today. The $31.5 billion trade surplus exceeded a median forecast of $27.4 billion.

“The higher-than-expected trade surplus has fuelled expectations that the yuan will appreciate more,” Lai said.

To contact the reporter on this story: Fion Li at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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