Yuan Advances Past 7 to Dollar, First Time Since End of Link

Judy Chen and Kim Kyoungwha
Bloomberg
Thursday, April 10, 2008

The yuan rose past 7 to the dollar for the first time since China scrapped its fixed-exchange rate in 2005 as policy makers accelerate gains to cool inflation at an 11-year high.

The currency strengthened as much as 0.16 percent to 6.9907, bringing the yuan's advance to 18.4 percent since the end of the peg. U.S. Treasury Secretary Henry Paulson said last week in Beijing it was ``dangerous'' for the exchange rate not to reflect the fundamentals of the world's fastest-growing major economy.

A stronger yuan helps reduce the cost of food imports and slows the nation's export-led expansion. China's consumer prices jumped 8.7 percent in February from a year earlier on higher food costs, raising the risk of unrest as Beijing prepares to host the Olympic Games this summer.

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``Inflation can be a very serious threat,'' said Naomi Fink, senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, who forecasts the yuan will reach 6.3 in a year. ``Certainly, China will keep accelerating the pace ahead of the Olympics and I don't think the authorities really want runaway inflation.''

The yuan rose 0.14 percent to 6.9916 at the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The yuan has taken less than six months to break 7 to the dollar after taking 1 1/2 years to climb to 7.5 from 8. Forward contracts show traders are betting on an 11.2 percent advance to 6.2898 in the next 12 months.

The currency's gain against the dollar since the peg ended compares with 5.5 percent for the Taiwan dollar, 9 percent for India's rupee and 34 percent for the Philippine peso. The yen has climbed 11.9 percent and South Korea's won 6 percent.

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