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Yuan Rises to 17-Year High Before President Hu’s U.S. Visit

The yuan rose to a 17-year high on signs China will allow appreciation before President Hu Jintao meets with President Barack Obama tomorrow in Washington.

The central bank set its daily fixing for the exchange rate at the strongest level since a peg ended in 2005, after a bipartisan group of U.S. Senators said yesterday they will pass legislation this year to push China to strengthen the currency. U.S. data shows the Asian nation had a $252 billion trade surplus with the world’s biggest economy in the first 11 months of 2010 and Treasury Secretary Timothy F. Geithner said last week the yuan should be allowed to appreciate “more rapidly.”

“China wants to be seen as moving the currency in the right direction as Hu meets with Obama, but without giving into international pressure,” said Brian Jackson, Hong Kong-based senior strategist at Royal Bank of Canada.

The yuan hit 6.5824 per dollar today, the strongest level since China unified official and market exchange rates at the end of 1993. It closed 0.15 percent stronger at 6.5829 in Shanghai, according to the China Foreign Exchange Trade System.

Twelve-month non-deliverable forwards rose 0.17 percent to 6.4552, reflecting bets the currency will gain 2 percent in a year. The People’s Bank of China set the yuan’s daily fixing at 6.5891 per dollar, compared with 6.5897 yesterday. The yuan is allowed to trade by up to 0.5 percent on either side of the so-called central parity rate.

Unfair Advantage

U.S. lawmakers said China’s intervention in the foreign-exchange market has kept the yuan artificially weak, giving its exporters an unfair advantage over American competitors. Senator Charles Schumer estimated yesterday that the currency is undervalued by as much as 40 percent.

The yuan exchange rate doesn’t drive trade imbalances, Chinese Foreign Ministry spokesman Hong Lei said in Beijing today, adding that China hopes U.S. lawmakers will see the big picture of relations between the two countries.

A stronger yuan may help China tame inflation, which accelerated to 5.1 percent in November, the fastest pace in more than two years. The central bank raised interest rates twice in the fourth quarter, boosting the attraction of holding the currency. The People’s Bank of China’s one-year deposit rate of 2.75 percent compares with the Federal Reserve’s near-zero benchmark rate.

“There’s also talk of further tightening policy, which is supporting the yuan,” said RBC’s Jackson.

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