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China's currency rose on speculation the government will use strength in the yuan to narrow the trade surplus and bonds advanced.
United States Labor Secretary Elaine Chao said yesterday that the Bush administration will keep pressing China to let the yuan appreciate at a faster pace to help close a trade deficit with the Asian nation. China's trade balance unexpectedly widened 4 percent in July from a year earlier to US$25.3 billion, the first increase in four months, according to China customs bureau figures released on August 11.
"China still has a huge trade surplus, giving room for appreciation of the yuan," said Xie Dongming, an analyst at Oversea-Chinese Banking Corp in Singapore. "The currency will appreciate more on a trade-weighted basis while its advance against the dollar will depend on the dollar's moves."
The yuan strengthened 0.05 percent to 6.8450 per US dollar yesterday in Shanghai, from 6.8481 on Monday, according to the China Foreign Exchange Trade System. The currency is allowed to trade by as much as 0.5 percent against the greenback either side of a daily rate set by the central bank, which was fixed at 6.8400 yesterday, Bloomberg News said.
The yuan has weakened 0.2 percent versus the US dollar this month, after a 6.9 percent gain in the first seven months of 2008. It fell by the most in four weeks on Monday.
The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six US trading partners, rose almost 1 percent yesterday. It touched 77.571, the highest since December 2007.
US Treasury Secretary Henry Paulson said on August 19 that China must let its currency appreciate to curb domestic inflation and defuse tensions in the US Congress that may prompt trade disputes. The yuan has gained 8.3 percent versus the euro and 4.3 percent against the yen this quarter, compared with a 0.09 percent advance versus the US dollar.
The central bank manages the yuan's exchange rate against a basket of currencies, including the yen and the euro, after scrapping a peg to the US dollar in 2005.
"We don't expect the appreciation trend of the yuan's nominal effective exchange rate to slow until policy makers are more convinced that the battle to reign in inflation has been won," David Mann and Callum Henderson, currency strategists at Standard Chartered Plc, wrote.
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