China long has been criticized for keeping its currency low in an effort to boost its export-dominated economy. Yet last month the yuan was one of the world's best-performing currencies, with more than a little help from its greenback friend.
In September, the yuan got a boost from its close association with the dollar. The currency, also known as the renminbi, is held to a narrow trading band by China's central bank.
China's raised that range by about 4% this year, including nine increases in September, even as the value of the dollar was soaring. The dollar itself surged 6.8% against the euro last month as investors sought a safe haven from the European debt crisis and signs of a global economic slowdown.
This means that the yuan's real effective exchange rate, which compares China's currency to a basket of its major trade partners and takes inflation into account, jumped 2.3% in September to its highest point since China granted the yuan some flexibility in June 2010, according to J.P. Morgan. Before then, it was fixed to the dollar.
On Tuesday, one dollar bought 6.376 yuan, about the same as the previous day.
The pace of the yuan's appreciation flips the script for the world's second-biggest economy and its trade partners, who have complained for years that China keeps the yuan artificially weak to give its exporters an edge.
That isn't enough to placate critics in the U.S., where the Democratic-controlled Senate on Monday voted to move forward with legislation that would punish China for its currency policy. But House Speaker John Boehner criticized the bill as "dangerous," a signal the GOP-led House is unlikely to take up the legislation.
The Obama administration has said it is reviewing the Senate bill. The administration has said it is pressuring China to alter its policy but has cautioned against taking unilateral action.
The Senate vote was only the latest action taken by governments around the world to attempt to neuter the impact of China's currency policies. Last month, Brazil increased a tax on cars with a high content of imported parts, a move to help domestic producers compete against cheap imports from places including China. Brazil, whose finance minister last year said an "international currency war" had broken out in response to several central-bank interventions, has pointed fingers at countries, including China and the U.S., it has said pursue policies resulting in weaker currencies.
While the stronger yuan "could help" improve Brazilian exporters' competitiveness by raising the cost of goods produced in China, the exchange rate would have to be much more favorable to give them an edge in a slower global economy, said Jose Augusto de Castro, interim president of the Brazilian Foreign Trade Association.
Meanwhile, the People's Bank of China cautioned in a statement that passage of the Senate bill won't resolve U.S. domestic economic difficulties but could instead "seriously affect" China's exchange-rate overhaul and even lead to a trade war. It said that with inflation factored in, the yuan has appreciated "greatly" and is close to a balanced level.
"I don't think China will make any big move in response," said UBS economist Wang Tao. She said there is only a small chance the bill will become law.
Beijing also reiterated its longstanding pledge to continue exchange-rate overhauls.
Indeed, both the Foreign Ministry and central bank on Tuesday repeated Beijing's standard rhetoric that China will continue to increase the yuan's flexibility over time.
China's current account surplus, a measure of the country's exports versus imports, already was falling before September, reaching 2.8% of gross domestic product in the first half of 2011, down from 5% a year earlier.
China's export prices also are rising due to domestic cost increases and yuan appreciation, said Li Cui, Royal Bank of Scotland's chief China economist.
"The price adjustment is taking place more through real appreciation. It's a modest first step; nonetheless, it's a significant first step," she said.
Meanwhile, late Tuesday in New York, the euro rose to $1.3352, from $1.3176 late Monday. The dollar was at ¥76.81 from ¥76.64. The British pound was at $1.5489 from $1.5432. The dollar bought 0.9162 Swiss franc from 0.9216 franc late Monday.
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