The Chinese currency continued to strengthen against the U.S. dollar for the third trading day on Friday after authorities said the country was considering a new yuan-dollar pricing formula to curb volatility.
Following a 0.8 percent increase on the previous session, the central parity rate of the yuan strengthened 20 basis points to 6.807 against the greenback Friday, its highest since Nov. 10 last year, according to China Foreign Exchange Trade System (CFETS).
The central parity rate is a weighted average of quotes from dealer banks, and follows a formula based on the previous day's closing rate and changes in a basket of selected currencies.
Under China's market-based, managed floating exchange rate system, the yuan can rise or fall by 2 percent against the U.S. dollar from the central parity rate each trading day.
The CFETS said the new formula will allow dealers to incorporate a "counter cyclical factor" into the existing formula to "appropriately hedge against the pro-cyclical fluctuation in market sentiment and alleviate the potential for herd behavior in the forex market."
China's forex market is easily influenced by irrational expectations and spurred by inertia, due to a certain level of "pro-cyclicality," which distorts market demand and supply, and magnifies the risk of exchange rate overcorrection, the CFETS said in a statement.
The CFETS did not give further details about when and how the "counter cyclical factor" will be used, but revealed that a number of dealer banks have already made adjustments on specific pricing models for their quotes.
Latest comments