The yuan advanced to a 17-year high on speculation China will favor currency gains as part of efforts to tame the fastest inflation since 2008.

The People's Bank of China set the reference rate for yuan trading 0.1 percent stronger at 6.3883 per dollar today, the strongest level since July 2005. The central bank broadened the base of reserves it requires commercial lenders to deposit with it to control liquidity, economists said late last week. Fighting inflation will remain the top priority in the second half of 2011 and monetary policy will remain "prudent," the central bank said in a quarterly report on Aug. 12.

"The latest move on banks' reserves confirms the fact that China will continue to tighten monetary policy to ease inflationary pressure," said Daniel Chan, Hong Kong-based economist at BWC Capital Markets. "It also implies the government is going to allow a stronger currency to lower imported food and material costs."

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