China Raises Yuan Against Dollar to Fight Inflation

China is letting the yuan to hit record highs against the dollar as it shifts focus from supporting exporters to controlling its surging inflation rate.

The renminbi’s target exchange rate was raised to 6.3925 yuan per dollar on August 16 by the People’s Bank of China which acts as China’s central bank. This is the highest level since China adopted a managed floating exchange rate regime in July of 2005.

The yuan has risen for five straight business days since Aug. 10. Its dollar exchange rate has risen 3.5 percent since the start of 2011.

The change reflects an effort to use the stronger renminbi to cut the cost of imported food and other resources.

The renminbi began climbing on Aug. 10, the day after China announced a 6.5% rise in the consumer price index (CPI) for July and the U.S. Federal Reserve committed to keeping its virtually zero-interest policy until mid-2013.

A stronger renminbi augurs China’s long-term shift away from concentrating its $3 trillion dollar foreign reserves in the dollar. Currently $2 trillion of those reserves are held in dollar-denominated assets, including $1.17 trillion in Treasury bonds.