Yuan Rises Most in Two Weeks; Reserve Plan Sparks Dollar Drop

The yuan rose the most in almost two weeks against the dollar after China's plans to diversify its $1.43 trillion in foreign-exchange reserves caused the U.S. currency to extend a global slump.

The Chinese yuan climbed 0.28 percent to the highest since the central bank ended a decade-long peg and started managing the exchange rate against a basket of currencies. While the yuan has gained 5.3 percent against the dollar this year, it dropped 5 percent against the euro and 10 percent versus the Australian dollar, increasing the cost of imports and fueling inflation.

``China needn't do much to mitigate the dollar's slump'' against the yuan, said Li Huiyong, an economist at Shenyin Wanguo Research and Consulting Co. in Shanghai. ``Instead, it should take this opportunity to relax the domestic pressure for inflation.''

The yuan climbed to 7.4207 versus the dollar as of 5:30 p.m. in Shanghai from 7.4421 late yesterday, according to the China Foreign Exchange Trade System. It gained 0.31 percent on Oct. 29. Li said an annual 10 percent gain is acceptable for the economy, and ``no one doubts that the yuan is undervalued.''

Cheng Siwei, vice chairman of the National People's Congress, yesterday said at a Beijing conference that the government should diversify its foreign-exchange reserves by buying stronger currencies. The U.S. currency fell versus the euro and traded at a 26-year low against the British pound.

``Cheng's speech was a trigger for further dollar weakness in the international market, pushing the yuan higher,'' said Karen Shu, a currency trader with Standard Chartered Plc in Shanghai. ``Even if the central bank doesn't want to see a fast appreciation, the yuan has to rise since it is managed against a basket of currencies, most of which rose against the dollar.''
financeonlinecharts.com