The yuan could gain 7 percent against the U.S. dollar by the end of 2005 after China allows the currency to trade in a wider band from as early as the current quarter, JPMorgan Chase Bank said on Monday.

"All signs are consistently pointing to a near-term yuan revaluation," Claudio Piron, JPMorgan's Asia currency strategist said in a note to clients.

"Fundamentals have been demanding a move for sometime, and the strategic environment is also pointing to an opportune time for change."

Investors have raised their bets since the middle of April that China would imminently relax controls over its tightly controlled currency after the country's central bank chief said there were no serious technical or political obstacles to reforming the currency regime.

Some of those bets were pared on Monday after China left its currency policy unchanged, quelling speculation it would revalue the yuan when the local currency market reopened for trading after a week-long Labour Day holiday.

China has kept the yuan in a tight range near 8.28 per dollar since the 1997/98 Asian financial crisis. 

It has resisted pressure from the United States and Europe to let the yuan appreciate, saying that it needs more time to fix its financial system before it loosens controls.

ABN AMRO Bank sees a move on the currency later this year.

Currency strategist Irene Cheung said in a report on Monday she expects China to widen the yuan's trading band in the fourth quarter, allowing it to gain as much as 3 percent. The yuan could gain another 5 percent to 10 percent against the dollar in 2006, she said.

JPMorgan's view was that China was likely to start with a modest widening of the yuan's trading band by June, allowing the currency to move within a range of 1.0 percent to 1.5 percent on either side of a mid-point. It would then let the mid-point fluctuate along with market forces.

The mid-point would be derived by calculating the weighted average of the closing rate on the day prior to the start of the new regime.

Piron said the South Korean won, Taiwan dollar and Hong Kong dollar forwards were likely to be the biggest gainers from a strengthening yuan because of North Asia's growing economic linkages with China.

"The strength of economic linkages suggests yuan spillover to Asia should extend beyond mere market enthusiasm and into longer-term benefits for regional currencies," Piron wrote.

"While the extent of the initial yuan move could disappoint and sentiment could swing post-revaluation, the underlying backdrop of growing economic integration, along with a downward trending U.S. dollar should provide medium-term Asia currency support."

JPMorgan's analysis, based on trade linkages and intervention policies across Asia, also showed that Southeast Asian currencies could underperform after China lets the yuan strengthen.

(Photo source: Reuters)

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