* Yuan up over 5 pct since depegging, 1.5 pct this year
* Crossing 6.5 likely to be flagged as evidence of flexibility
* Some analysts point to band widening as possibility
* Rise vs. dollar could help broader emerging FX gains (Updates to close)
SHANGHAI, April 29 - China's yuan breezed past 6.50 per dollar on Friday, surpassing the psychologically important level for the first time and raising expectations that Beijing will continue to let the currency strengthen quickly to battle stubbornly high inflation.
While the 6.50 per dollar level is not significant from a technical standpoint, Chinese media and economists are likely to seize on it as evidence of how far the government has come in allowing it to appreciate since its landmark currency reforms in 2005. It has gained 27.5 percent since then.
China's decision to loosen the reins on the yuan could also encourage further rises in other emerging-market currencies, especially in Asia, helping to temper the impact of high commodity prices as governments from Beijing to Bangkok battle imported inflation.
Traders seized on momentum created by the central bank through its daily mid-point settings, pushing the currency to as high as 6.4892 per dollar in spot market trade on Friday before closing at 6.4910, meaning the currency has now gained 5.2 percent against the dollar since it was unleashed from a de facto peg last June.
"This is a signal they will continue appreciation. We can't see any signs they will actually speed up appreciation, but they are likely to keep to the pace that we're seeing now," said Liu Dongliang, analyst at China Merchants Bank in Shenzhen.
The People's Bank of China (PBOC) guided the yuan up by 0.9 percent in April compared with 0.4 percent in March, accelerating its appreciation at a time when the dollar has fallen to three-year lows against a basket of currencies.
The PBOC set the tone for Friday's trade by setting the yuan's mid-point -- the level from which dollar/yuan may rise or fall 0.5 percent during the day -- at another fresh high, after a string of record high fixings over the last few weeks.
CRITICS IN WASHINGTON UNIMPRESSED
Policymakers in Beijing have made it increasingly clear that they are willing to use the currency as one way of fighting inflation, which hit a 32-month high of 5.4 percent in March, by helping to buffer the impact of imported commodity prices.
That is in keeping with Beijing's long-standing stance that it will let the yuan become more flexible over time, out of its own interests -- and not because of pressure from the outside.
Still, some of the strongest critics of China's currency policy have continued to keep up their pressure for more action.
"Despite its rampant inflation problem, China's government does not seem prepared to let the value of the yuan rise much higher above its present level," the New York Democrat said in a statement. [ID:nW1E7FI01E]
Analysts and traders expect the yuan to continue to rise at a relatively rapid pace. Many onshore forex traders expect roughly 5-6 percent appreciation for the year as a whole, which would imply around 4.5 percent further in gains yet this year.
Traders in offshore yuan forwards have also begun to bet on more gains in recent weeks. At the end of March, implied yuan appreciation over the next year stood at just 1.7 percent, but that has risen to 2.9 percent now.
Bets on more yuan gains have also risen in the offshore yuan market in Hong Kong, which tends to have a strong correlation with expected yuan appreciation.
While the spread between offshore and onshore yuan had virtually disappeared in recent months on a surge of yuan into the territory from mainland importers, the differential have sprung up again of late, widening to a chunky 0.04 yuan on Monday before narrowing somewhat later in the week.
FREEING UP EMERGING CURRENCY GAINS?
With China continuing to allow only incremental gains against the dollar, however, the yuan has continued to fall against the currencies of other major trading partners such as Japan and European countries as the dollar has plunged.
The yuan's nominal effective exchange rate (NEER), its value against a trade-weighted basket, has fallen by around 2 percent since November 2010, adding to pressure on Beijing to do more if it does not want imports on a broader basis to become more dear.
Still, most analysts do not expect any drastic measures from the government, despite some market rumours in recent weeks about the possibility of a one-off revaluation to help temper expectations of stronger imported inflation.
For one, China racked up a rare trade deficit in the first quarter, partly due to higher import prices, something the powerful export lobby is likely to be pointing to as a reason to proceed with caution on the yuan, sometimes referred to as CNY.
More likely than a revaluation might be some further tweak to the foreign exchange regime, such as a widening of the daily trading band, which would at least send a signal on authorities' intentions, even if the band is rarely fully used.
"We haven't heard that they will widen the trading band, but if they did so it wouldn't be too surprising," said Liu.
A continued rise in the yuan would probably be welcomed as well in other Asian emerging markets, as it would put them at less of a disadvantage in trade if they let their own currencies rise.
"The currency war has clearly morphed into a war against inflation among EM policymakers in recent weeks, and China's willingness to see a faster pace of CNY appreciation is likely to provide more support for EM currencies going forward," said Nizam Idris, emerging market strategist at UBS in Singapore.