BEIJING—China's yuan reached its highest level against U.S. dollar in seven months on Thursday, as fresh economic data offered hopes for a stabilizing economy.
Since late last year, the yuan has weakened modestly against the dollar, falling as much as 1.6% against the U.S. currency in late July. But the Chinese currency has reversed course recently and hit a seven-month intraday high during Thursday's trading, at 6.2945 against the dollar. The yuan is now down just 0.2% against the dollar this year.
China's central bank, which has been guiding the currency on a stronger path in recent weeks, Thursday guided the yuan a bit stronger. Traders said the recent yuan guidance reflected the broad weakness in the dollar against other currencies following massive stimulus plans by the European Central Bank and the U.S. Federal Reserve.
Traders and analysts also attributed the recent rally to a combination of market factors, including the latest data on China's manufacturing sector. While the negative reading from the preliminary HSBC China Manufacturing Purchasing Managers Index drove down markets elsewhere, many traders in China said the data showed China's manufacturing sector was stabilizing instead of growing worse.
In particular, they said, a potentially stabilizing Chinese economy has reduced market expectations for an interest-rate cut by China's central bank. Traditionally, lower interest rates make a country's currency less attractive to investors.
"Improved global sentiments and expectations that things might be bottoming out in China gave yuan a jolt today," said analyst Perry Kojodjojo at HSBC Holdings HSBA.LN -0.32% PLC in Hong Kong.
But given China's shrinking trade surpluses, Mr. Kojodjojo said, he expects the yuan to appreciate little in the next three months and trade between 6.29 and 6.30 against the dollar.
China's central bank, the People's Bank of China, tightly controls the yuan's movements against the dollar, setting a daily rate for it, known as the parity rate. The yuan is permitted to move no more than 1% above or below that rate.
This year a number of factors have led the PBOC to let the yuan weaken. A cheaper yuan, which makes Chinese goods less expensive in dollar terms, is helping Chinese exporters cope with slowing economic growth and reducing the chances of massive layoffs prior to the country's once-in-a-decade leadership change, which is set to begin in coming weeks or months. Traders have pressured the yuan over concerns about China's economy and a surge in corporate demand for dollars. Meanwhile, China trade data this year have weakened the argument that the yuan is significantly undervalued.
In light of the recent weakness in the dollar, "Chinese companies have gone from hoarding dollar to selling dollar again," said He Weisheng, an analyst at Citigroup Inc. C +0.70% in Shanghai.
Mr. He said the PBOC is expected to keep the yuan's exchange rate stable throughout the rest of the year.
