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Yuan Forwards Gain on Record Reference Rate, Bernanke’s Comments

Yuan forwards snapped a three-day decline after China’s central bank set a record reference rate for the currency and Federal Reserve Chairman Ben S. Bernanke said he’s prepared to do more to stimulate U.S. economic growth.

The People’s Bank of China raised the fixing 0.15 percent to 6.2829 per dollar, the strongest level since a peg ended in July 2005. The Fed reiterated a pledge yesterday to keep U.S. borrowing costs “exceptionally low” through 2014 and upgraded its economic growth forecast for the world’s largest economy. The fourth round of the U.S.-China strategic and economic dialogue will start in Beijing in a week’s time and be attended by U.S. Treasury Secretary Timothy F. Geithner, Secretary of State Hillary Clinton and Chinese Vice Premier Wang Qishan.

“A better U.S. outlook will boost prospects for Chinese exports and hence support the yuan,” said Banny Lam, a Hong Kong-based economist at CCB International Securities Ltd., a unit of China’s second-largest bank. “China typically strengthens the reference rate before high-level meetings with the U.S. to promote a positive atmosphere for talks.”

Twelve-month non-deliverable forwards strengthened 0.04 percent to 6.3478 per dollar as of 4:51 p.m. in Hong Kong, a 0.7 percent discount to the onshore spot rate, according to data compiled by Bloomberg.

The yuan slipped 0.03 percent to close at 6.3060 in Shanghai, according to the China Foreign Exchange Trade System, after advancing as much 0.09 percent earlier. The currency is allowed to trade up to 1 percent on either side of the central bank’s daily fixing. In Hong Kong’s offshore market, the yuan gained 0.03 percent to 6.3038.

‘Slow Process’

One-month implied volatility for the currency, a measure of exchange-rate swings used to price options, fell 10 basis points, or 0.1 percentage point, to 2 percent.

The record fixing “should not be interpreted as a sudden shift towards renewed appreciation,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a research note today. The yuan will gain “in a slow process” to 6.2 per dollar by the end of 2012, he forecast.

China’s economy may grow about 8.7 percent this year, the official Xinhua News Agency reported yesterday, citing a report by the Chinese Academy of Social Sciences. The trade surplus may be $126 billion, Xinhua said.

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