China's currency witnessed its largest dip for a month yesterday, coming shortly after comments from central bank governor saying the yuan's pace of appreciation was "appropriate."

 

This statement from bank chief Zhou Xiaochuan had made faster gains unlikely and dampened expectations to that effect.

 

Analysts said the yuan, set to continue its long-term rise, would likely undergo minor short-term adjustments following blistering gains in the past few weeks.

 

The yuan settled yesterday at 7.7570 against the US dollar, easing 0.12 percent from 7.7476 on Friday. This marked the biggest drop since January 8 when the yuan fell 0.16 percent.

 

"Yesterday's loss was led by Zhou's remarks at the G-7 meeting that the pace of gains was appropriate," said Jin Di, a trader at the Bank of China, referring to the Germany gathering of the Group of Seven industrialized nations.

 

Jin expects the yuan to level out at 7.75 against the greenback for a few days, as Zhou's comment indicates the currency will not be allowed to accelerate. This is a rare torpor for the yuan, in the year that has so far seen it set 11 new highs.

 

It has risen by 6.6 percent since July 2005 when China removed the yuan's 8.28 peg to the dollar, trading it in for a more complex match to a basket of foreign currencies. Currently, the yuan is able to evolve within a daily trading band of 0.3 percent.

 

Zhou said in Germany that he saw the yuan's "pace of appreciation is suitable, adding that exchange rate flexibility was increasing according to China's domestic planning and economic ability plans.

 

Zhou's reaction came in response to repeated G-7 calls for the yuan to become more flexible, as a rising trade surplus continues to raise western worries.

 

The country's trade surplus, driven by overseas sales, reached US$15.9 billion in January following a staggering US$177.5 billion gap last year, the Ministry of Commerce said yesterday.

 

The massive imbalance has made the country's banking system awash with cash and raised optimism for the yuan to appreciate faster.

 

(Shanghai Daily February 13, 2007)