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China's yuan eases after 3-day rally, still near highest since May 2016

SHANGHAI, Sept 5 (Reuters) - China's yuan on Tuesday eased against the U.S. dollar, after rallying for three days, but the Chinese currency remained near its strongest level since May 2016. Prior to market opening on Tuesday, the People's Bank of China raised its official yuan midpoint for the seventh straight session, to 6.5370 per dollar, the strongest level since May 18, 2016. The higher fix reflected gains in the spot yuan rate from a day earlier more than dollar movements in global markets, traders said. Tuesday's midpoint, which was 298 pips or 0.45 percent firmer than the previous fix, was the biggest move in percentage terms since Aug. 10. Monday's guidance was 6.5668 per dollar. But the stronger guidance did not lift the spot yuan . It opened at 6.5414 per dollar and was changing hands at 6.5375 at midday, 55 pips weaker than the previous late session close and 0.01 percent softer than the midpoint. Traders said a slide in the offshore yuan's at the start of trade on Tuesday forced onshore participants to purchase dollars to cover their short positions in the greenback at around 6.5250 per dollar. Offshore spot hit a low of 6.5503 at 0122 GMT, and at midday was trading 0.17 percent weaker than its onshore counterpart at 6.5487 per dollar. "It was traders' proprietary dollar purchases that dragged the spot yuan lower," said a trader at a foreign bank in Shanghai. Some market players noted that there were faint signs that major state-owned banks purchased dollars on Monday afternoon, but that could mean big banks traded on their own behalf. For daily guidance rates and market performance, traders believe the authorities are maintaining a neutral attitude towards recent gains in the yuan. They expect the yuan's movement in the near term to remain highly dependent on the authorities' attitude and dollar's performance in overseas markets. Economists at Citi said in a note on Tuesday morning that investors would look to the central bank to judge whether the pace of yuan rallies needed to be "attenuated." "It would not be unusual for authorities to seek to calm market sentiment in some such manner," they said. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.18, weaker than the previous day's 96.39. The global dollar index slipped to 92.499 from the previous close of 92.635. 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 6.6875, 2.25 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0359 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.537 6.5668 0.46% Spot yuan 6.5375 6.532 -0.08% Divergence from 0.01%

midpoint*

Spot change YTD 6.26% Spot change since 2005 26.60%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.18 96.39 -0.2

Reuters/HKEX CNH index

Dollar index 92.499 92.635 -0.2

*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 6.5487 -0.17% * Offshore 6.6875 -2.25%

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 Andrew Galbraith; Editing by Richard Borsuk)