Yuan rises on Paulson's comments

The yuan rose to the highest since a fixed exchange rate to the dollar ended in 2005 as the US Treasury Secretary Henry Paulson said that China understands the need for a more flexible exchange rate.

Reports this week showed inflation at an 11-year high, a widening trade surplus and rising retail sales, supporting arguments that a stronger yuan is needed to cool the economy. China "recognizes'' the need for greater fluctuations, Paulson said in his closing statement at the Strategic Economic Dialogue meetings outside Beijing.

"China is letting the yuan gain further, but it's still not as fast as everybody in the Western world wants,'' said Steven Chang, vice president for global markets at State Street Bank in Hong Kong. "The focus is now shifting to China's domestic picture and the need to control inflation.''

The currency rose 0.11 per cent to 7.3692 a dollar as of the 5:30 pm close in Shanghai from 7.3770 late yesterday, according to the China Foreign Exchange Trade System. It earlier touched 7.3640, taking gains to more than 12 per cent since the link to the US currency was scrapped in July 2005.

The yuan also tracked gains in the yen and the euro, components of a basket against which the currency is managed. Since ending the peg, the People's Bank of China has allowed the yuan to float with reference to the basket, which also includes the British pound and South Korea's won.

Governor Zhou Xiaochuan said this week that China will use exchange-rate policy to cool the economy. Consumer prices rose 6.9 per cent in November, while a separate report showed that China's trade surplus rose 15 per cent to $26.3 billion last month, the nation's third highest monthly total.

The economy expanded 11.5 per cent in the third quarter.

Yen recovers from low on credit losses
The yen rose from a one-month low against the dollar on speculation that a Federal Reserve-led plan to provide banks with extra funds won't resolve the credit-market turmoil, prompting investors to exit so-called carry trades.

The yen gained against all 16 most-active currencies after Bank of America and Wachovia said that provisions for loan defaults will increase, spurring investors to repay funds borrowed in Japan to buy higher-yielding assets. The yen strengthened the most against the South African rand, Australian dollar and British pound, beneficiaries of the carry trade.

"Carry trades are being unwound,'' said Kamal Sharma, a London-based currency strategist at Bank of America. "It's risk aversion. It's suggestive of the view that the coordinated action by central banks will not alleviate all the problems that financial institutions are incurring at the moment.''

Japan's currency climbed to 111.75 a dollar at 9:51 am in London, from 112.24 yesterday, when it fell to a one-month low of 112.47. It advanced to 164.26 a euro, from 165.04.

The dollar erased an earlier loss against the euro to trade little changed at $1.47. It strengthened versus the British pound to $2.0429 from $2.0469 after a survey by the Royal Institution of Chartered Surveyors showed the UK housing-market slowdown worsened in November.

The Swiss franc was little changed against the euro at 1.6689, close to a five-week low, after the Swiss National Bank kept its interest-rate target at 2.75 per cent, as expected by most economists.

Peso climbs on inflows
The Philippine peso gained to the strongest since April 2000 on optimism that foreign-exchange inflows will rise after the government yesterday moved closer to selling the operating rights to its power grid.

The peso climbed for a 10th day after a group led by China's State Grid submitted an offer of $3.95 billion for a 25-year contract to run and expand the nation's power transmission network. The peso has gained 19 per cent this year, the best performer among the 10 most active currencies in Asia outside Japan, helped by remittances from Filipinos working overseas.

"The successful transmission-grid bidding signals sustained inflows over a longer period and also signals improving government finances,'' said Ricky Cebrero, a treasurer at East West Banking in Manila. "All these are happening on the back of a fundamentally strong inflow of remittances.''

The currency rose 0.2 per cent to 41.225 a dollar at the 4 pm close of trading in Manila, according to Tullett Prebon, the world's second largest inter-dealer broker. The peso has gained 9.7 per cent this quarter, headed for its best three-month advance in nine years.

A quarter of the funds for the power grid will be paid after the winning group secures a congressional franchise within a year and the rest will be payable over 20 years, Jose Ibazeta, who heads the government's power sector agency, said yesterday.