Yuan sets new peak against US dollar for seventh time in May

SHANGHAI (REUTERS) - China's yuan hit a record high against the dollar on Monday for the seventh time this month after the central bank set the midpoint at its strongest level.

Spot yuan changed hands at 6.1256 against the dollar in late morning trade, its highest since China set up the domestic foreign exchange market in 1994. It eased 3 pips to 6.1259 at midday, still up from 6.1316 at Friday's close.

Before trade began, the People's Bank of China (PBOC) fixed the yuan's midpoint at an all-time high of 6.1811, compared with Friday's midpoint of 6.1867, which was also a record high. The yuan is allowed to rise or fall 1 per cent in a day from the PBOC's base rate.

The central bank has guided the yuan to a succession of record highs since early April as the government appears to be gradually moving to create conditions for a more flexible exchange-rate regime, traders said.

By letting the yuan rise, the bank hopes to find the range where supply and demand for dollars is balanced, traders said, but such a range has yet to be found yet as the currency continues to trade near the strong end of the trading band.

The yuan has appreciated in inflation-adjusted terms against a basket of global currencies every month since September 2012, according to data from the Bank for International Settlements.

However, while the government is allowing a faster pace of yuan appreciation because inflows now dominate China's cross-the-board capital movements, it could also permit the yuan to depreciate sharply once the flow pattern reverses, traders said.

The PBOC allows the exchange rate to rise or fall 1 percent from the official midpoint rate it sets each morning.