Yuan strongest since scrapping of $ peg

ASIAN CURRENCIES ROUND-UP

The yuan rose to the highest since a dollar peg was scrapped in 2005 as China pledged to extend efforts to slow the export-led economic expansion and curb inflation.

The vice finance minister Li Yong said yesterday the government's policy will focus on "structural adjustments and help in solving the problem of excess liquidity.''

Faster currency gains may help narrow the trade surplus that shrank in the past two months, by making exports more expensive to overseas buyers and lowering the cost of imports.

"China authorities are willing to allow the yuan to appreciate faster,'' said Thio Chin Loo, a currency strategist with BNP Paribas in Singapore. "The trade surplus narrowed a bit, but it's too early to conclude that it's starting a trend.''

The yuan rose to 7.2516 against the dollar as of 5:30 pm in Shanghai from 7.2620 last week, according to data compiled by Bloomberg. The currency has advanced 14 per cent since the end of the fixed exchange rate in 2005.

The Chinese government has raised the interest rates six times in a year, restricted credit, frozen some prices and let the currency appreciate to damp growth and inflation.

The tougher policies may be starting to pay off, data showed on January 11.

Last month's trade surplus shrank to $22.7 billion from $26.2 billion in November, and the broadest measure of money supply rose by the least in seven months.

The yuan will rise to 6.83 a dollar by the end of 2008, according to the median estimate of 29 analysts surveyed by Bloomberg News. Forward contracts show that traders are betting on a 9.6 per cent advance to 6.6135 in the next 12 months.

Taiwan's dollar advanced on speculation that economic ties with China will improve after the opposition Kuomintang party's victory in parliamentary elections.

The currency gained for a second day as Ma Ying-jeou, the KMT's candidate for the March 22 presidential election, promised to lower tensions with China and ease restrictions on Taiwanese investment on the mainland.

China is Taiwan's biggest market for exports, which account for about half of the island's economy.

"The results will favour Taiwanese stocks and that will support the Taiwan dollar,'' said Sadaaki Kondou, assistant general manager of treasury at Mizuho Corporate Bank in Taipei. "Foreign investors will probably return to Taiwan as they had stayed away from the local markets before the election.''

The Taiwan dollar rose 0.3 per cent to NT$32.370 against the US currency as of 5 pm local time, according to Taipei Forex. The currency may strengthen to NT$32.35 this week, Kondou said.

The KMT, which favours closer ties with China, won 81 seats and the ruling Democratic Progressive Party 27 in the new, smaller 113-member parliament in the January 12 election. Going into the election, the KMT and its coalition allies had 114 of 225 seats.

The Philippine peso rose on speculation that overseas workers will send more money home to prevent the currency's appreciation from eroding the value of the funds.

The currency is the best performing in Asia, outside Japan, this year and reached the highest since 2000, reducing the earnings of Philippine nationals abroad who send money to their families. Overseas investment in power, tourism and business outsourcing will continue to pour in as the Philippine government lifts public works spending, said Marvin Fausto, chief investment officer at BDO Unibank in Manila.

"Workers will have to send in more dollars now to compensate'' for the shortfall due to the strong peso, said Fausto, who helps manage the equivalent of $5.9 billion.

The currency added 0.1 per cent against the US dollar to 40.555 in Manila, according to Tullett Prebon.

The Indonesian rupiah fell on speculation that higher dollar- denominated commodity prices will stoke demand for the US currency among importers.

The rupiah traded near the lowest in a week as the central bank may prefer a weaker currency to help spur exports as US economic growth slows down. Indonesia is the sole net importer of crude among OPEC's 12 oil-producing members.