SHANGHAI, Feb 28 (Reuters) - China's yuan weakened against the U.S. dollar on Wednesday, reflecting how the greenback gained support from Federal Reserve Chairman Jerome Powell's hawkish tone that increased bets the United States could have four interest rate hikes this year. The Chinese currency was on course for a loss in February, its first for a month since September. The dollar stood near a three-week high against a basket of currencies on Wednesday after Powell's congressional testimony.
Some U.S. market players projected four rate hikes this year, compared with the three in the Fed's economic projections in December. In Shanghai, traders said the dollar's boost after Powell's comments piled downward pressure on the Chinese currency on Wednesday morning. They said the February reading in China's official Purchasing Managers' Index (PMI), the weakest since July 2016, did not impact the yuan. Prior to market opening, the People's Bank of China set the midpoint rate at 6.3294 per dollar, 148 pips or 0.23 percent weaker than Tuesday's fix of 6.3146. In the spot market, the onshore yuan opened at 6.3284 per dollar and was changing hands at 6.3290 at midday, 120 pips weaker than the previous late session close. If the yuan finishes the late night session at the midday level, it would have weakened around 0.7 percent to the dollar in February, the first losing month since September. The yuan had a sharp 3.5 percent gain in January, the best monthly performance since 1994, while the year-to-date gain has shrunk to 2.8 percent after recent volatility. Nie Wen, economist at Hwabao Trust in Shanghai, said state media started singing the praises of two-way fluctuations in the yuan once it rose past the 6.3 per dollar level, indicating authorities might not be willing to see a strong one-way bet on the Chinese unit strengthening. He predicted that at the end of this year, the yuan would be in a range between 6.2 and 6.5 per dollar. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.4, firmer than the previous day's 97.25. The global dollar index rose to 90.402 from the previous close of 90.355. The offshore yuan was trading 0.02 percent firmer than the onshore spot at 6.3276 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 6.4565, 1.97 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0409 GMT:
Item Current Previous Change PBOC midpoint 6.3294 6.3146 -0.23% Spot yuan 6.329 6.317 -0.19% Divergence from -0.01%
Spot change YTD 2.81% Spot change since 2005 30.77%
Item Current Previous Change Thomson 97.4 97.25 0.2
Reuters/HKEX CNH index
Dollar index 90.402 90.355 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
Offshore spot yuan 6.3276 0.02% * Offshore 6.4565 -1.97%
*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)