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China's yuan nudges higher against weaker dollar

SHANGHAI, Dec 6 (Reuters) - China's yuan edged up against a weaker U.S. dollar in thin trade on Wednesday, while volatility in the Chinese currency declined following this week's launch of a new trading system. The dollar slipped against its major peers, as concerns about a possible U.S. government shutdown offset optimism about progress on tax reform legislation. Government funding is due to run out on Friday. Prior to the market opening on Wednesday, the People's Bank of China (PBOC) set the midpoint rate lower for an eighth straight trading day at 6.6163 per dollar, the longest weakening streak since mid-November. Wednesday's official fix, 50 pips or 0.08 percent weaker than the previous fix of 6.6113, was the weakest since Nov. 22. Multiple traders said Wednesday's fix came in weaker than their models had suggested. In the spot market, the onshore yuan opened at 6.6178 per dollar and was changing hands at 6.6147 at midday, 41 pips firmer than the previous late session close and 0.02 percent stronger than the midpoint. Volatility in the Chinese currency has been falling recently, with some traders pointing to Monday's launch of a new trading system that matches orders for USD/CNY trades among market-makers. Traders said the market was stable in morning trade, and investors have yet to determine a clear direction for either the dollar or the yuan. The yuan was likely to trade a range of 6.57 to 6.70 per dollar in December, said a chief dealer at a Chinese bank in Shanghai. However, some market watchers said they would pay close attention to China's monetary policy stance in coming weeks, as that would likely affect the movements of the yuan. "The necessity for the PBOC to defend the yuan through a rise in money market rates has reduced markedly in our view," Gao Qi, FX strategist at Scotiabank in Singapore, said in a note. Gao added that he expected the central bank would likely raise market rates, including interest rates on reverse repos and medium-term lending facility (MLF) loans, following an expected U.S. Federal Reserve rate hike this month. The PBOC is expected to use its MLF one more time in the middle of this month, the Financial News, a central bank-run newspaper said on Wednesday, right after the central bank injected 188 bullion yuan through such a bond instrument.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.13, above the previous day's 95.06. The global dollar index fell to 93.214 from the previous close of 93.379. The offshore yuan was trading 0.04 percent weaker than the onshore spot at 6.6175 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 6.7775, 2.38 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0416 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.6163 6.6113 -0.08% Spot yuan 6.6147 6.6188 0.06% Divergence from -0.02%

midpoint*

Spot change YTD 5.02% Spot change since 2005 25.12%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.13 95.06 0.1

Reuters/HKEX CNH index

Dollar index 93.214 93.379 -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 6.6175 -0.04% * Offshore 6.7775 -2.38%

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 Pullin)