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Yuan hits new high on weakened greenback

By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-10-29 11:40

China's currency reached a new record high against the US dollar on Monday as the greenback continued to weaken on speculation of another interest rate cut by the Federal Reserve.

Before trading started on Monday, the People's Bank of China (PBOC) set the yuan at 7.4718 relative to the dollar. The new midpoint marked the fifth consecutive session of gains. The yuan can move 0.5 percent up or down the midpoint each day.

Monday's gain was largely due to the weakening dollar, which fell as low as $1.4426 to the euro, the weakest since the introduction of the currency in 1999.

The American currency slumped due to expectations the Fed will reduce the federal funds rate, an overnight lending rate between banks, by at least a quarter-percentage point on October 31 from the current 4.75 percent, prompting investors to seek higher-yielding assets overseas.

In contrast, the PBOC is widely expected to raise the interest rate for the sixth time this year to prevent the economy from overheating and curb inflation.

The world's fourth largest economy grew 11.5 percent in the third quarter and the consumer price index jumped 6.2 percent in September for a 4.1 percent rise in the first three quarters, far above the 3 percent official target for this year.

Widening trade surplus is also exerting upward pressure on the yuan.

In the first nine months, China's trade surplus stood at $185.7 billion, official figures showed. That amount might reach $250 billion by the end of this year, compared with $77.5 billion in 2006, the Ministry of Commerce said in a report on Saturday.

The yuan has appreciated more than 10 percent against the greenback since the country ended its peg to the US dollar in July 2005.