The yuan is likely to appreciate against the US dollar this week after China raised the bank reserve ratio in an effort to curb liquidity and shift from an overly easy monetary policy.

The Chinese currency edged up against the greenback last week and ended at 6.8271 on Friday, according to the China Foreign Exchange Trade System. The yuan closed at 6.8279 at the end of the previous week.

The People's Bank of China last Tuesday said it would raise the reserve ratio - which is the amount of money a bank must deposit with the central bank - by 0.5 percentage point from today.

Morgan Stanley said in a research report on Friday that the central bank's move suggested a rise in interest rate will occur soon.

On the same day, the central bank also raised the return on its 20 billion yuan central bank one-year bills to 1.8434 percent, the first increase since August.

Zhu Jianfang, the chief economist of Citic Securities, said in a note last Wednesday that officials may let the yuan climb by 3 to 5 percent this year.

Goldman Sachs said in a report on Friday that exchange rates will play a more vital role in policy adjustment, citing a rebound in external demand and a growth in bank loans in the first quarter of this year that may trigger inflation risks.

Its report forecast the Consumer Price Index, a main gauge of inflation, may hit 4 percent in the third quarter of this year.

(Shanghai Daily January 18, 2010)