The People's Bank of China set the yuan's central parity rate at 7.7351 against the greenback yesterday, the highest since the dollar link was scrapped in July 2005.

The yuan closed at 7.736 after touching an intraday high of 7.733.

It ended trading on Friday at 7.736.

"Saturday's interest rate hikes spurred the uptick in the currency," said Jin Di, a Shanghai-based trader at the Bank of China. "The yuan is due for long-term upward momentum as the central bank carries out its commitment for gradual appreciation."

The national currency has gained 6.6 percent since China ended the peg of 8.28 yuan to the greenback and weighed it against a basket of currencies.

The central bank on Saturday raised the benchmark one-year lending rate by 0.27 percentage points to 6.39 percent and lifted the one-year deposit rate by the same amount to 2.79 percent.

The weekend action was the central bank's third rate increase since last year as part of its effort to rein in liquidity, keep consumer prices stable and apply the brakes to the sizzling economy.

"The current tightening episode may be just another interim step along China's long march to get its interest rate and the currency to the right levels," said Liang Hong, an economist at the Global Investment Research Division of Goldman Sachs.

Zhou Xiaochuan, governor of the People's Bank of China, said earlier this month during the National People's Congress that the Chinese government may consider widening the yuan's trading band.

The PBOC allows a daily 0.3 percent trading fluctuation on either side of the parity rate, which the central bank calculates based on average weighted quotes from more than 10 commercial banks that serve as market makers to provide advice on the currency's expected movement.

Analysts believe that increasing the flexibility of the exchange rate mechanism will help moderates China's huge trade surplus, which swelled to 177.5 billion US dollars last year from 102 billion US dollars in 2005 and is attracting complaints from some Western countries.

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