Yuan Strengthens as Hu Tells Obama China to Improve Flexibility

The yuan snapped a two-day decline after the central bank set a record fixing for the third day as Chinese President Hu Jintao told U.S. President Barack Obama the country will allow a more flexible exchange rate.

China plans to “let the market play a greater role” and increase flexibility of the yuan, Hu told Obama in a meeting in Seoul yesterday, according to a statement on the foreign ministry website. Hu said yuan appreciation won’t solve the U.S. trade deficit and unemployment. Federal Reserve Chairman Ben S. Bernanke said yesterday continued accommodative monetary policy will be needed to create jobs, weakening the dollar.

“Hu’s remarks and the fixing give signals that the yuan will continue its appreciation path, although that could be a bit bumpy on the uncertain global economic outlook,” said Patrick Cheng, a Hong Kong-based foreign-exchange analyst at Haitong International Securities Co. “The expectations on another round of quantitative easing also boosted demand for non-dollar assets.”

The yuan gained 0.11 percent to close at 6.3072 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency has declined 0.2 percent this quarter, the first loss since 2009.

The People’s Bank of China set the yuan’s reference rate at 6.2840 per dollar today, the strongest level since the nation ended a dollar peg in July 2005 and 0.48 percent higher than yesterday’s closing price of 6.3140. The currency is allowed to move as much as 0.5 percent on either side of the fixing.

In Hong Kong’s offshore market, the yuan rose 0.07 percent to 6.3138. Twelve-month non-deliverable forwards increased 0.08 percent to 6.3347, a 0.4 percent discount to the onshore spot rate, according to data compiled by Bloomberg.

One-month implied volatility for the yuan, a measure of exchange-rate swings used to price options, fell 10 basis points to 2.4 percent.

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