SHANGHAI, Sept 1 (Reuters) - China's yuan strengthened to a fresh 14-month high against the U.S. dollar on Friday after its best month on record, buoyed by strong guidance while the dollar remained under pressure. The Chinese currency extended gains from its late domestic close on Thursday to end the month 2.1 percent stronger than the dollar - its best month since 1994 - when China unified official and market exchange rates and price data was available. Prior to the market open on Friday, the People's Bank of China raised its official yuan midpoint to 6.5909 per dollar, past the key psychologically important 6.6 level for the first time since June 2016. The midpoint, the strongest level since June 24, 2016, was 101 pips or 0.15 percent firmer than the previous fix of 6.6010 set on Thursday. In the spot market, the yuan opened at 6.5860 per dollar and rose to a high of 6.5781, also the strongest since June last year. The yuan was changing hands at 6.5806 by midday, 83 pips firmer than the previous late session close and 0.16 percent stronger than the midpoint. "Some companies who held long dollar positions were in a panic as the (USD/CNY) movements in the past few days suggested it would likely fall further," said a trader at a Chinese bank. If the yuan finishes the late night session at the current level, it would have gained more than 1 percent against the dollar, set for its best week since July 2005, when the currency was revalued and taken off a fixed dollar peg. Traders said corporate dollar sales remained strong in morning trade on Friday, with a trader at an Asian bank expecting the trend to persist in the near term. The dollar came under further pressure after U.S. annual inflation increased at its slowest pace since late 2015, casting doubts on whether the Federal Reserve would raise rates again this year. Investors were also cautious ahead of monthly U.S. employment data later in the global session. The global dollar index, a gauge that measures the dollar strength against six other currencies, fell to 92.651 at midday, from the previous close of 92.668. Several onshore traders said retail business at their bank showed net foreign exchange purchases in August, meaning there were more corporate dollar sales than dollar purchases were executed last month. Separately, market watchers expected the yuan to remain stable before the Party Congress. State media said on Thursday that China's ruling Communist Party would hold a once-every-five-years congress starting on Oct. 18, at which President Xi Jinping would look to further stamp his authority on the party. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.66, firmer than the previous day's 95.61. The offshore yuan was trading 0.02 percent weaker than the onshore spot at 6.5822 per dollar. 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 6.7235, 1.97 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0400 GMT:
Item Current Previous Change PBOC midpoint 6.5909 6.601 0.15% Spot yuan 6.5806 6.5889 0.13% Divergence from -0.16%
Spot change YTD 5.56% Spot change since 2005 25.77%
Item Current Previous Change Thomson 95.66 95.61 0.1
Reuters/HKEX CNH index
Dollar index 92.651 92.668 0.0
*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 6.5822 -0.02% * Offshore 6.7235 -1.97%
*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 Jacqueline Wong)