SHANGHAI, Dec 29 (Reuters) - China's yuan leapt to a fresh 3-1/2-month high against the U.S. dollar in thin trading on Friday, and is on course for its best year in nine, supported by broad weakness in the greenback. The dollar wallowed near a one-month low against a basket of currencies on Friday morning in thin year-end trading. The dollar index, a gauge that measures the unit's strength against six other major currencies, stood at 92.623 at midday, not far from an overnight low of 92.573, its weakest since Nov. 27. Prior to market opening on Friday, the People's Bank of China (PBOC) lifted its official yuan midpoint to a fresh 3-1/2-month high at 6.5342 per dollar. Friday's official midpoint was 70 pips, or 0.11 percent, firmer than the previous fix of 6.5412 on Thursday, which was the strongest since Sept. 12. The official fixing has registered an annual rise of around 6.2 percent in 2017, the steepest gain in percentage terms since 2008. The higher fixing gave spot yuan trade a boost. The onshore yuan opened at 6.5325 per dollar and rose to a high of 6.5100, the strongest level since Sept. 11. As of midday, the onshore spot yuan was trading at 6.5170 at midday, 163 pips firmer than the previous late session close and 0.26 percent stronger than the midpoint. If the yuan ends the late night session at the level hit during Asian hours, it would have strengthened around 6.6 percent against the dollar for the year, registering the best annual performance since 2008 and reversing three years of depreciation. In 2016, the yuan booked an annual loss of around 6.5 percent, the worst since 1994. The offshore yuan also followed the trend. It was trading 0.11 percent weaker than the onshore spot at 6.5244 per dollar at midday. Traders said the strength in the yuan was supported by broad weakness on Friday morning. Xu Hanfei, analyst at China Merchants Securities, said in a note that the recent rally in the Chinese currency was supported by liquidity tightness in the domestic financial markets. "The yuan has no base for a continuous strengthening in the wake of fiscal expenditure and targeted reserve requirement ratio (RRR) cut," Xu said, expecting the yuan to have two-way volatility while trading in a range of 6.4 to 7.0 per dollar in 2018. The PBOC on Friday said it is setting up a temporary liquidity facility that will let commercial banks have more cash available ahead of the coming Lunar New Year. Some banks will be allowed to lower their reserve requirement ratios by up to 2 percentage points, for 30 days, according to the central bank statement. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.94, firmer than the previous day's 95.85. 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 6.6675, 2.00 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 4:05AM GMT:
Item Current Previous Change PBOC midpoint 6.5342 6.5412 0.11% Spot yuan 6.517 6.5333 0.25% Divergence from -0.26%
Spot change YTD 6.59% Spot change since 2005 27.00%
Item Current Previous Change Thomson 95.94 95.85 0.1
Reuters/HKEX CNH index
Dollar index 92.623 92.602 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 6.5244 -0.11% * Offshore 6.6675 -2.00%
*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 Brenda Goh; Editing by Sam Holmes)