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Yuan weakens to near 4-week low but seen levelling out for now

SHANGHAI, Sept 25 (Reuters) - China's yuan slipped through the psychologically important 6.6 per dollar level on Monday to its weakest level in nearly four weeks, dragged lower by a softer central bank fixing and rising seasonal demand for the greenback. The Chinese currency weakened for a second straight week last week, losing 0.6 percent of its value against the dollar. It has retreated more than 1,700 pips from a 21-month peak hit on Aug. 8, sparking talk that authorities are growing uncomfortable with its rapid gains in recent months and the potential impact on exporters. Prior to the market opening on Monday, the People's Bank of China lowered its official yuan midpoint to 6.5945 per dollar, the weakest level since Aug. 31, reflecting broad dollar strength in global markets. Monday's fixing was 84 pips or 0.13 percent weaker than the previous fix of 6.5861 on Friday, and largely matched market forecasts, traders said. The weaker midpoint guided the spot yuan, which opened at 6.5974 per dollar and weakened to a low of 6.6098 in early trade, the softest level since Aug. 29. As of midday, spot yuan was changing hands at 6.6022, 132 pips weaker than the previous late session close and 0.12 percent softer than the midpoint. It had dipped briefly below the 6.6 level last week. Dollar demand rose on Monday as both companies and households stepped up dollar buying ahead of the week-long National Day holiday starting this Sunday. Traders said 6.6 remained a key resistance point, as companies which hold long dollar positions often begin liquidating them at that level. Bank clients therefore suspect spot yuan has hit a bottom in the near term. Market participants also expect authorities will want to keep the yuan relatively stable in the run-up to a key Communist Party meeting starting on Oct. 18. Any disruptions in markets or the economy would be unwelcome ahead of the Communist Party Congress, where President Xi Jinping hopes to strengthen and extend his leadership of the party. On a trade-weighted basis, the yuan weakened only 0.34 percent against a basket of currencies of trading partners last week, according to official data from the China Foreign Exchange Trade System (CFETS). The index, published on a weekly basis, stood at 94.54 on Friday. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.42, weaker than the previous day's 95.58. The global dollar index rose to 92.244 from the previous close of 92.171. The offshore yuan was trading 0.10 percent firmer than the onshore spot at 6.5957 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 6.737, 2.12 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0358 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5945 6.5861 -0.13% Spot yuan 6.6022 6.589 -0.20% Divergence from 0.12%

midpoint*

Spot change YTD 5.22% Spot change since 2005 25.36%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.42 95.58 -0.2

Reuters/HKEX CNH index

Dollar index 92.244 92.171 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

from onshore

Offshore spot yuan 6.5957 0.10% * Offshore 6.737 -2.12%

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 Kim Coghill)