Yen Bulls Bow To Beijing. By Nicholas Hastings

China could well pave the way for more yen gains against the dollar.

As Beijing prepares for a visit by U.S. President Barack Obama next week, the Peoples' Bank of China has made a broad hint that it could allow the yuan to rise against the dollar again.

This would not only mean a reduction in PBOC purchases of the dollar, to help keep the yuan stable against the U.S. currency, but it would also mean a less competitive Chinese currency, which would be good news for Japan - and thus the yen.



Although China had previously allowed a gradual appreciation in the yuan against the dollar between July 2005 and June 2008, this policy was brought to an end as the credit crunch crisis swept the globe last year and threatened the growth prospects of most major economies, including China.

Of course, the PBOC's hint of a higher yuan this week, largely through its failure to commit to a "basically stable" currency as it has in the recent past, could be dismissed as nothing more than a diplomatic gesture ahead of Obama's visit. The omission by the PBOC was made in the bank's quarterly report on monetary policy.

China, which has been under pressure for some time to break the yuan's peg with the dollar and allow it to rise, is well known for making last minute concessions ahead of key meetings with U.S. leaders.

However, Obama's visit apart, there is plenty of reason to suggest that allowing the yuan to rise against the dollar now would be beneficial for China as much as for anyone else.

Now that the global economy is showing signs of recovery, China no longer needs to ensure quite such rapid growth at home.

Data this week, showing that industrial production rose by over 16% in the last year, was evidence enough that the policies adopted by Beijing over the past year have been successful in keeping China at the forefront of the global economy.

In fact, the policies have been nearly too successful with new M2 money supply figures indicating a rise that could bring a return of sharp inflationary pressures next year.

Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ in London, put it this way: "The question now that needs to be addressed is when will the action taken to date impact the economy to such an extent that the focus of economic policy in China shifts from supporting economic growth to tempering building inflationary pressures."

By allowing the yuan to rise, Beijing would in effect be tightening monetary policy and reducing the risk of inflation.

Some economists, such as those at Commerzbank, feel that any move to release the yuan may not be so urgent. They point to other data showing weak export growth, which suggests that a stronger yuan may not be appropriate at this stage.

Nevertheless, the strength of China's recovery and the timing of Obama's visit means that speculation over a rise in the yuan - either through a gradual appreciation or a one-off revaluation - is back on the currency agenda.

Early Friday in Europe, the dollar was under a little pressure again as investors appeared to take profits on recent gains ahead of the weekend.

Despite a continued decline in global equities and signs that the recent rally in commodities may be over, the euro was still able to push ahead to $1.4870 by 0645 GMT from $1.4841 late Thursday in New York, according to EBS.

The euro was also up at Y134.31 from Y134.15, while the dollar fell to Y90.29 from Y90.40.