Yuan slightly lower on global dollar strength

* Yuan 0.03 pct weaker at 6.2155/dlr near midday

* Dollar index up 0.6 pct in Asian trade

* PBOC favors stability amid currency war fears

SHANGHAI, March 18 (Reuters) - China's yuan edged lower on Monday after the central bank set a slightly weaker midpoint to reflect the dollar's global rally, traders said. Spot yuan was trading at 6.2155 per dollar near midday, down 0.03 percent from Friday's close of 6.2135 after the People's Bank of China let the currency weaken 0.03 percent in its midpoint. Volume was sluggish at $3.3 billion. Globally, the dollar index rose 0.6 percent in Asian morning trade after euro zone finance ministers wanted Cypriots to pay up to 9.9 percent of their deposits in return for a 10 billion euro ($13.07 billion) aid package. If approved by the island's parliament on Monday, it will be the first time savers have had to foot part of the bill for a European bailout, raising fears that the model could become a precedent for future bailouts in the euro zone. "The yuan could have fallen much more due to the dollar's rally had the PBOC not maintained its midpoint largely stable," said a trader at a major Chinese commercial bank in Shanghai. "The central bank's efforts to keep the yuan largely stable for now underlines market expectations that the yuan is likely to remain large unchanged in the near term." The PBOC appears to be taking a wait-and-see approach in terms of a response to the weakening of Asian currencies, notably the Japanese yen. The central bank has so far not pulled the yuan weaker to offset the impact of the weaker Japanese currency, but it has also kept a lid on market forces that might otherwise push the yuan higher. Traders expect the yuan to hold steady in the weeks ahead, fluctuating between 6.21 and 6.24. But if the yen and other Asian currencies fall much further, some traders predict the PBOC could force the yuan weaker by as much as two percent. On the other hand, if the midpoint strengthens to below 6.27, traders say the market will take it as a sign that PBOC is prepared to accept further appreciation in the spot rate.

The onshore spot yuan market at a glance:

Item Current Previous Change

(pct)

PBOC midpoint 6.2741 6.2723 -0.03 Spot yuan 6.2155 6.2135 -0.03 Divergence from -0.93

midpoint*

Spot change ytd +0.24 Spot change since 2005 revaluation +33.16

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

The offshore yuan market at a glance

Instrument Current Difference from

onshore (pct)

Offshore spot yuan 6.2100 *0.09

(pct)

Offshore non-deliverable 6.3065 **-0.52

forwards

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

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MARKET DRIVERS - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate yuan purchases in recent months reflect heightened yuan appreciation expectations or at least a reduction in long dollar positions. GRAPHIC: http://link.reuters.com/syx74t

- Hot money inflows, which should support yuan appreciation, returned in Jan following nine straight months of outflows. GRAPHIC: http://link.reuters.com/raz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t

RECENT DEVELOPMENTS - China PBOC's Yi sees faster progress on capital account reforms - China restrains yuan rise in response to Asian currency weakness - China eyes market forces to drive FX reform

- Bank of China extends yuan deposits to promote redback's rise - Taiwan yuan bonds may be dogged by policy barriers

- Spot yuan has rallied strongly since late July 2012, and the PBOC is using its daily midpoint to restrain further appreciation. GRAPHIC: http://link.reuters.com/pyx74t

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(Editing by Sanjeev Miglani)