UPDATE: China Yuan At New High For Modern Era After PBOC Move

By Joy C. Shaw

DOW JONES NEWSWIRES

Vs Parity Pvs USD/CNY Central Parity 6.8275 6.8275 USD/CNY OTC 0930 GMT 6.7976 -0.44% 6.8262 High 6.8272 0.00% Low 6.7958 -0.46%

SHANGHAI (Dow Jones)--China's yuan surged to its highest level against the U.S. dollar in the modern era late Monday afternoon due to strong demand from both onshore and offshore traders following the central bank's weekend announcement that it would make its exchange-rate regime more flexible.

Traders said the market will closely monitor the People's Bank of China's daily dollar-yuan central parity rate for cues in the coming sessions. If the fixing remains close to Monday's 6.8275, reflecting the central bank's focus on stability, the dollar could rebound strongly Tuesday, they said.

On the over-the-counter market, the dollar was at CNY6.7976 around 0930 GMT Monday, down sharply from Friday's close of CNY6.8262, meaning the yuan appreciated 0.4% against the dollar.

The dollar traded between CNY6.7958--lower than its previous post-revaluation low of CNY6.8099 on Sept. 23, 2008--and CNY6.8272.

The yuan nominally had a higher exchange rate against the dollar in the 1980s, before the currency was allowed to be traded as part of China's market-oriented reforms.

Beijing fixed the yuan's value near 8.6 per dollar 1994, before pegging it again in 2001 in a very narrow range around 8.277 yuan per dollar. Under enormous political pressure from major trading partners, China's central bank revalued the yuan again in July 2005 and let it appreciate steadily against the dollar until mid 2008, when it halted the yuan's rise amid the global financial crisis.

Monday's session featured the most volatile trading in a year and a half, with the spread between the day's highest and lowest levels reaching CNY0.314, the widest since Dec. 3, 2008, when it was CNY0.343.

The PBOC said Saturday it will allow more flexibility in the yuan's exchange rate, a move widely seen as signaling the central bank will let the yuan resume a gradual rise against the dollar.

Early in the day, the over-the-counter spot dollar-yuan rate hovered near its closing level Friday after the PBOC kept the central parity rate at 6.8275, unchanged from Friday's level.

However, investors started having second thoughts about the PBOC's signal later in the day.

"At the beginning, the market was around the level of Friday's close. But the market is now turning to focus on the prospect of the yuan appreciating in the near term," said a Shanghai-based trader at a foreign bank.

Traders said demand for the yuan intensified in the onshore spot market in the mid-morning after someone posted offers to sell dollars below the market levels on the automatic price-matching system.

The price-matching system is a little-used anonymous trading platform that dealers believe the PBOC uses on occasion to signal its intentions to the market, while not officially showing its hand.

"There are some names selling in relatively low rates in the automatic price-matching system," said a Shanghai-based trader at a foreign bank.

A Shanghai-based trader at local bank said: "We think the central bank could be signaling widening market fluctuations through the system."

In the offshore market, one-year dollar-yuan nondeliverable forwards fell to 6.6370/6.6430, implying a 2.4% appreciation in the yuan against the dollar in one year, from 6.7050/6.7100 late Friday.



-By Joy C. Shaw, Dow Jones Newswires; (86-21) 6120-1200; joy.shaw@dowjones.com