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China's yuan firms on stronger fixing, set for best day in nearly 2 months

SHANGHAI, July 27 (Reuters) - China's yuan firmed against the dollar on Thursday and is on course for its best day in nearly two months, supported by a much stronger official guidance rate after the greenback was hit by diminished expectations of a further U.S. rate hike by year-end. Prior to market opening, the People's Bank of China (PBOC) set the yuan midpoint at 6.7307 per dollar on Thursday, the strongest level since Oct. 18 2016, and up 222 pips or 0.33 percent firmer than the previous fix at 6.7529. It was biggest one-day rise in the guidance rate in percentage terms since June 28. The dollar fell overnight, touching its lowest level in more than a year against a basket of currencies after the Federal Reserve's July policy statement raised concerns about slow inflation and trimmed expectations of another rate rise by year-end. The dollar index, a gauge that measures the dollar strength against six other currencies, stood at 93.254 after falling to a low of 93.152, having lost more than 10 percent from its 14-year high of 103.82 set on Jan 3. In the spot market, the yuan opened at 6.7370 per dollar and rose to a high of 6.7235 before changing hands at 6.7272 at midday, 283 pips firmer than the previous late session close and 0.05 percent stronger than the midpoint. That translated into a 0.42 percent rise against the greenback for the day and would be the biggest gain since May 31 if the current strength was maintained by the close. "The yuan was basically following the dollar's movements in morning trade," said a trader at a Chinese bank in Shanghai, adding orders from companies on dollar purchases and sales were balanced. Market participants say most traders have shifted from holding an entrenched bearish view on the yuan following concerted efforts by Beijing to stabilise the currency since the second quarter. The dollar is now seen under pressure given the Fed's more cautious stance on further rate increases. The offshore yuan was trading 1 pip weaker than the onshore spot at 6.7273 per dollar as of midday. Meanwhile, surveys showed that foreign exchange turnover in the Chinese yuan in the world's biggest currency centres declined in April, dealing another blow to China's attempts to promote the trading of its currency in global markets.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.68, weaker than the previous day's 93.93. 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 6.857, 1.84 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0352 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.7307 6.7529 0.33% Spot yuan 6.7272 6.7555 0.42% Divergence from -0.05%

midpoint*

Spot change YTD 3.26% Spot change since 2005 23.03%

revaluation

Key indexes:

Item Current Previous Change Thomson 93.68 93.93 -0.3

Reuters/HKEX CNH index

Dollar index 93.254 93.672 -0.5

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

from onshore

Offshore spot yuan 6.7273 0.00% * Offshore 6.857 -1.84%

non-deliverable forwards

**

*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 John Ruwitch; Editing by Shri Navaratnam)