By Saumya Vaishampayan

HONG KONG--China guided the yuan 0.9% stronger against the U.S. dollar Friday, its biggest increase since 2005, when the central bank surprised markets world-wide by removing its dollar peg.

The People's Bank of China set the daily midpoint for the dollar at 6.8668 yuan, compared with 6.9307 yuan on Thursday. The yuan's 0.9% gain in the fixing was the largest since July 22, 2005, according to Thomson Reuters data. China had pegged the yuan's value at 8.28 to the dollar for more than a decade until July 21, 2005.

Friday's fixing is the latest sign that Chinese authorities are fighting to control the yuan's descent. The cost to borrow the yuan in Hong Kong--the biggest hub for trading outside mainland China--has surged in recent weeks as the central bank has cracked down on wagers against the currency.

But it will be an uphill battle for the central bank, as many investors still expect the yuan to decline in the long run. In fact, the yuan fell 0.2% to 6.8964 to the dollar in Asia morning trade on Friday. In offshore markets, the yuan fell 0.5%, with one dollar buying 6.8243 yuan. On Wednesday and Thursday in the offshore market, the yuan surged 2.5% against the dollar.

Investors betting on a decline in the yuan often short the currency by borrowing yuan in Hong Kong swapping them for dollars and later swapping them back at a more favorable rate. That trade becomes more expensive as yuan borrowing costs rise, which can force investors to abandon those bets by buying back yuan, in turn driving the currency higher.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com

(END) Dow Jones Newswires

January 05, 2017 22:29 ET (03:29 GMT)

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