(Adds details, updates prices) SHANGHAI, June 29 (Reuters) - Support from China's state banks helped the yuan strengthen to its highest level in seven and-a-half months against a broadly weaker dollar on Thursday, dealers said. The People's Bank of China set the yuan midpoint rate at 6.794 per dollar prior to market open, its strongest level since June 15, and 0.2 percent firmer than the previous day's fix. Traders said the fixing matched their expectations as it reflect the dollar's weakness on global markets. The dollar index, which measures its strength against six other currencies, fell to a low of 95.754 on Thursday - the lowest level since last October, though it later steadied to 95.872. In the spot market, the yuan firmed from the open to trade at 6.7795 per dollar by midday, 202 pips firmer than the previous late session close and 0.21 percent stronger than the midpoint. It had opened at 6.7966 per dollar, and rose to 6.7722 per dollar in initial trade, its strongest level since Nov.9 2016. "The sudden gains in the yuan were mainly due to strength in non-dollar currencies," said a trader at a Chinese bank in Shanghai. Multiple traders said the spot yuan also drew support by onshore dollar selling by major state-owned banks, a trend seen in the past few sessions. State banks have been regular dollar sellers since late last year in what traders believe is part of official efforts to prevent the yuan from weakening too fast. A chief dealer at another Chinese bank said corporate dollar demand appeared subdued on Thursday, although June and July usually saw stronger demand for the greenback from companies. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.36, firmer than the previous day's 94.33. The offshore yuan was trading 0.10 percent weaker than onshore spot at 6.7863 per dollar at midday. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.9598, 2.38 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0345 GMT:
Item Current Previous Change PBOC midpoint 6.794 6.8053 0.17% Spot yuan 6.7795 6.7997 0.30% Divergence from -0.21%
Spot change YTD 2.47% Spot change since 2005 22.08%
Item Current Previous Change Thomson 94.36 94.33 0.0
Reuters/HKEX CNH index
Dollar index 95.872 96.01 -0.1
*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 2 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
Instrument Current Difference
Offshore spot yuan 6.7863 -0.10% * Offshore 6.9598 -2.38%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
(Reporting by Winni Zhou and Andrew Galbraith; Editing by Simon Cameron-Moore)