SHANGHAI, Jan 19 (Reuters) - China's yuan extended gains against the U.S. dollar on Friday to breach the key 6.4 per dollar level for the first time in more than two years, underpinned by broad weakness in the greenback. The Chinese currency looked set for its sixth straight weekly gain, the longest winning streak since January 2017. The renminbi has risen 1.8 percent on the dollar so far this year, after climbing around 6.8 percent in 2017 that reversed three straight years of depreciation. "We still believe that the People's Bank of China (PBOC) will likely keep (the yuan) mostly stable against the basket for the next couple of years, leaving CNY pivoting mostly on USD movements," Wang Tao, chief China economist at UBS Investment Research said in a note. "Should the USD weaken further, CNY may appreciate even more against USD this year, though likely not fully matching USD weakness in order to accumulate some buffer," she added. The dollar was lodged near a three-year low against a basket of currencies on Friday, with fears over a possible U.S. government shutdown adding to its underlying woes stemming from its eroding yield advantage. Prior to market opening on Friday, the PBOC set its official yuan midpoint at a more than two-year high of 6.4169 per dollar. Friday's official midpoint was 232 pips, or 0.36 percent, firmer than the previous fix of 6.4401 on Thursday and was the strongest since Dec. 9, 2015. In the spot market, the onshore yuan opened at 6.4100 per dollar and was changing hands at 6.3941 at midday, 239 pips firmer than the previous late session close and 0.36 percent firmer than the midpoint. The midday level was the strongest since Dec. 4, 2015. If the yuan ends the late night session at the midday level, it would have strengthened 1.13 percent against the dollar this week. It firmed around 0.34 percent a week earlier. Its offshore counterpart also breached the key 6.4 per dollar level to hit a high of 6.3917 per dollar at one point in morning trade, the strongest since Nov. 17, 2015. As of midday, the offshore yuan traded at 6.3940 per dollar. The yuan's breach of the psychologically-important 6.4 hurdle prompted a build-up of long positions in the currency on Friday, traders said, but market participants are also wary the authorities may step in if gains are too rapid. Several Chinese bank traders and analysts said the authorities were likely to loosen their tight grip on foreign exchange purchase checks if they started to feel uneasy about the strength in the yuan. Separately, strong economic fundamentals also bolstered the yuan. China's economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years. That allayed concerns that intensifying curbs on industry and credit would take a big toll on the economy. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.38, firmer than the previous day's 96.19. The global dollar index fell to 90.351 from the previous close of 90.498. 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 6.513, 1.48 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0418 GMT:
Item Current Previous Change PBOC midpoint 6.4169 6.4401 0.36% Spot yuan 6.3941 6.418 0.37% Divergence from -0.36%
Spot change YTD 1.76% Spot change since 2005 29.44%
Item Current Previous Change Thomson 96.38 96.19 0.2
Reuters/HKEX CNH index
Dollar index 90.351 90.498 -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
Offshore spot yuan 6.394 0.00% * Offshore 6.513 -1.48%
*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 Jacqueline Wong)