Yuan Touches Record High Against Dollar

 The Chinese yuan hit a record high against the U.S. dollar in intraday trading on Wednesday as higher interest rates in China drove investors to bet on the nation’s currency.

China’s higher rates are making the yuan attractive and expectations that the People’s Bank of China will maintain a hawkish monetary stance are prompting investors to increase their bets on the yuan, said Zhou Hao, an economist at Australia & New Zealand Banking Group in Shanghai.

The yuan hit 6.1203 versus the dollar in early trade, the strongest level in the modern era. Previously, the high was 6.1210 hit on both June 3 and May 27. At 0344 GMT, it had retreated to 6.1221, down slightly from Tuesday’s close of 6.1217.

Despite China’s slowing economy, the yuan has strengthened in recent weeks. At its strongest level of 6.1203, the yuan had risen by around 0.7% since May, and 1.8% year to date.

Borrowing costs soared in June amid a liquidity crunch in the nation’s banking system. While rates have declined, they remain higher than average levels prior to the cash crunch.

The yield on the benchmark seven-day repurchase agreement is last traded at 3.9%, compared with an average 3.3% in the first five months of this year.

“Despite some decline in money market rates, government and corporate bond yields are near their highest level in 2013,” said Zhang Zhiwei, an economist at Nomura in Hong Kong. “We believe it suggests the market expects persistently tight liquidity conditions and heightened credit risks.”

Mr. Zhang said he expects financing costs to remain high and lead to a lower than 7% growth in China’s economy in 2014.

In spite of the yuan’s recent strength, analysts and traders say it’s less likely that the central bank will widen the currency’s trading band in the short term, a move that has been expected for some time.

“The latest monetary policy report showed that the central bank wants to keep the yuan stable. A volatile forex market is definitely not what it wants,” said ANZ’s Mr. Zhou.

Beijing currently allows the dollar-yuan exchange rate to trade 1% above or below the daily reference rate, which the PBOC sets each morning. It has widened the trading band twice–the last time in April 2012–since it dropped the currency’s peg to the dollar in July 2005.