Yuan posts biggest gain since 2005

ASIAN CURRENCIES ROUND-UP

China's yuan rose the most since the end of a dollar link in July 2005 after Asian currencies that the central bank uses to monitor its exchange rate gained.

The currency ended a four-day decline as a government report showed the nation's trade surplus almost doubled from a year ago to a record $26.9 billion in June.

The People's Bank of China wants a stronger currency to curb exports because the influx of foreign exchange has helped fuel the fastest pace of inflation in more than two years.

"The dollar against emerging markets is weaker across the board, helping yuan gains,'' said Nizam Idris, currency strategist at UBS AG in Singapore. China's currency will rise 5 per cent this year against the dollar, he said. The yuan rose 0.27 percent to 7.5810 as of 5:30 p.m. in Shanghai, also the strongest close since the end of the fixed exchange rate.

All of the 10 most-traded Asian currencies tracked by Bloomberg data and the yen strengthened versus the dollar. While the yuan rose 1 percent against the dollar in the past month, it fell 0.6 percent versus the won and dropped 0.9 per cent against the Indian rupee.

US lawmakers have been urging China to let the yuan rise faster to help slow exports and curb the Asian nation's trade surplus. They blame a widening trade gap between the two countries on an undervalued Chinese currency.

YUAN FLEXIBILITY
Small yuan appreciation will only increase speculation that the currency will appreciate, the Securities Times newspaper yesterday said, citing a report written by Xia Bin, head of the Institute of Finance at the State Council's Development and Research Center.

Exchange-rate flexibility will increase, China Securities Journal yesterday reported, citing central bank Assistant Governor Yi Gang. The bank manages the yuan against a basket of currencies including the yen and South Korea's won.

The central bank today fixed the daily reference rate at 7.5845, the highest since the end of the dollar link.

China may let the yuan rise as much as 10 percent over the next 12 months as the government seeks to ease its trade surplus and slow inflation, said Ramon Maronilla, a portfolio manager at State Street Global Advisors Asia Ltd.

``Inflation pressures will lead to further policy tightening by year-end,'' said Maronilla, speaking to reporters yesterday at a press conference in Hong Kong on the bank's global economy and investment outlook.

China's consumer prices in May rose 3.4 percent from a year ago, the statistics bureau said on June 12.

BONDS FALL
China's government bonds fell on speculation prices of the new treasury notes to be issued later this week won't be enough to compensate for the accelerating inflation.

``The market is not optimistic about the new treasury issues,'' said Wang Haoyu, a fixed-income analyst with First Capital Securities Co. in Shenzhen.

The Ministry of Finance will auction 35 billion yuan ($4.6 billion) of three-year fixed-rate notes on July 13. Inflation erodes the value of fixed-income securities.

``The high inflation rate forecast makes the bonds even less attractive,'' Wang said. His company predicts the consumer price index to be between 4.3 percent and 4.5 percent for June, higher than the average market expectation of about 4 percent, according to Wang.

The yield on the three-year bond was little changed at 3.44 percent, according to China inter-bank bond data. The 2.66 percent security due February 2010 was at 98.085 from 98.086 yesterday. Bond yields move inversely to prices.