(Updates closing prices, adds details)
SHANGHAI, July 6 (Reuters) - The Chinese yuan surged on Monday and finished the domestic session at its strongest level in 3-1/2 months, as a spurt in China’s stock market on the back of economic recovery optimism underpinned sentiment.
The onshore yuan finished domestic trading at 7.0330 per dollar, the strongest such close since March 18, and was up 0.48% from the previous late night close.
The strength in the Chinese currency came after a state-run media commentary published over the weekend saying the A-share market had the basis and key elements for a bull market. It cited sound economic fundamentals, capital market reforms and continued fund inflows into Chinese shares.
The blue-chip CSI 300 index and the benchmark Shanghai Composite jumped more than 5% for the day, extending the previous week’s rallies.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0663 per dollar, 25 pips or 0.04% weaker than the previous fix of 7.0638.
A trader at a Chinese bank said whether gains in the yuan would be sustainable depended on the stock market’s performance, which should attract foreign capital inflows to support the local unit.
Some analysts, however, said the sharp rises in the stocks reminded them of the boom-and-bust during 2014 and 2015.
“It is reminiscent of the reckless A-share market rally in 2015, when the Shanghai Composite surged from around 3,000 to a high of 5,178 in four months before falling back to near 3,000 in two months,” Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said in a note.
In global markets, the yuan also led commodity currencies higher against the dollar as investors lapped up risky assets on growing expectations of a strong Chinese economic rebound.
Offshore yuan was trading at 7.0328 per dollar as of 0830 GMT. (Reporting by Winni Zhou and Andrew Galbraith Editing by Jacqueline Wong and Peter Graff)