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China's yuan weakens on dollar strength, set for 2nd weekly loss

SHANGHAI, Oct 27 (Reuters) - China's yuan weakened against the U.S. dollar on Friday after the central bank lowered its official midpoint by the most in five weeks, following the greenback's gain in global markets. The Chinese currency was on track for its second straight weekly loss. The U.S. dollar rose on Friday while the euro slumped to three-month lows after the European Central Bank extended its bond purchases and reduced the chances that it would hike interest rates in 2018. The global dollar index, a gauge that measures dollar strength against six other currencies, increased to 94.774 from the previous close of 94.612. Prior to market opening on Friday, the People's Bank of China (PBOC) set its official yuan midpoint to the lowest level in nearly three weeks to 6.6473 per dollar. The move in the midpoint was the biggest one-day weakening in percentage terms since Sept. 21. Friday's official fixing, 185 pips or 0.28 percent softer than the previous fix of 6.6288 per dollar on Thursday, was the weakest since Oct. 9. Traders said Friday's guidance rate matched market forecast. In the spot market, the onshore yuan opened at 6.6555 per dollar and weakened to 6.6645 per dollar at one point, the softest level since Sept.29. At midday, the onshore spot yuan was changing hands at 6.6498, or 63 pips weaker than the previous late session close and 0.04 percent softer than the midpoint. If spot yuan closes the late night session at the midday level, it would have lost 0.46 percent against the greenback this week. In the previous week, the yuan slipped 0.59 percent. Traders said the yuan's recent trade was mainly driven by market force as the authorities has "basically exited" from its regular yuan intervention as how the foreign exchange regulator said during the congress. A trader at a foreign bank in Shanghai said the weakness in the onshore spot yuan reflected gains in the U.S. unit, while some market participants' dollar selling to lock in profits limited losses in the onshore yuan on Friday morning. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.85, firmer than the previous day's 95.61. The offshore yuan was trading 0.04 percent weaker than the onshore spot at 6.6525 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 6.806, 2.33 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0413 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.6473 6.6288 -0.28% Spot yuan 6.6498 6.6435 -0.09% Divergence from 0.04%

midpoint*

Spot change YTD 4.46% Spot change since 2005 24.46%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.85 95.61 0.3

Reuters/HKEX CNH index

Dollar index 94.774 94.612 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 6.6525 -0.04% * Offshore 6.806 -2.33%

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 Richard Borsuk)