China raises yuan rate to 16-month high as dollar sags

Analysts said the yuan's rise has been due mainly to a sagging dollar, which has been hit by Hurricane Irma and doubts over further U.S. interest rate hikes.

"The appreciation of the RMB against the USD this year has been driven by a combination of USD weakness, China's tighter management of capital outflows, reduced risk of large scale U.S.-China trade war, and improved economic performance and market sentiment on China," UBS China economist Wang Tao said in a note.

China allows the yuan to rise or fall only two percent either side of a fixed daily rate to control volatility.

The yuan has been under pressure since late 2015 from uncertainty over the health of the world's second-largest economy, massive capital outflows seeking better returns abroad, and a sharp rise in the dollar.

Earlier this year, it flirted with the 7.0-to-the-dollar level, a threshold not crossed in more than eight years.

China has taken various measures to shore up its currency, including rolling out new restrictions to curb the outflow of money into "irrational" investments overseas.

Michael Every, senior Asia-Pacific strategist for Rabobank Hong Kong, also believes that China may have raised the value of the yuan ahead of a key Communist Party congress next month.

"It’s almost all a weak USD and the rest of it is China wanting to look strong before the 19th Party Congress.

"Nothing -- and I stress nothing -- has improved fundamentally in China to justify it."

The onshore yuan traded at 6.4501 on Friday afternoon, up 0.72 percent from Thursday’s close of 6.4972, according to the Foreign Exchange Trade System.