China's yuan inches up as Tillerson dismissal weakens dollar

SHANGHAI, March 14 (Reuters) - China's yuan rose against the dollar on Wednesday after the sudden dismissal of U.S. Secretary of State Rex Tillerson sent the greenback lower and China's central bank lifted its official midpoint to a two-week high. The dollar was also impacted by U.S. inflation data, which reinforced views the U.S. Federal Reserve remained on track to raise interest rates at a gradual pace. Prior to market opening, the People's Bank of China set the midpoint rate at 6.3205 per dollar, 13 pips firmer than the previous fix of 6.3218. Wednesday's official guidance rate was the strongest since Feb. 27. "Hopefully the Fed can provide some stability in market confidence next week by clarifying its position on monetary policy, which we believe could see the FOMC forecast of policy rate hikes moving from three this year to four, based on robust economic fundamentals," Tai Hui, chief market strategist for Asia Pacific at J.P. Morgan Asset Management said in a note on Wednesday. The strength of the PBOC's fixing pushed the spot yuan higher. The onshore yuan opened at 6.3238 per dollar and rose to a high of 6.3136, its firmest since March 6. As of midday, the onshore spot rate was changing hands at 6.3162 at midday, 78 pips firmer than the previous late session close and 0.07 percent stronger than the midpoint. Traders attributed the gains in the yuan to the falling dollar. A trader at a Chinese bank said the yuan should continue trading in a thin range tracking the greenback's movements in global markets. "If the dollar figures out a directional trend, the yuan might breach the current range," the trader said. Many market participants expect the yuan to continue rangebound between 6.30 and 6.36 in the near term. U.S. President Donald Trump is seeking to impose tariffs on up to $60 billion of Chinese imports and will target the technology and telecommunications sectors, according to two people who had discussed the issue with the Trump administration. Markets anxiously await how China would respond to the increasingly hawkish U.S. trade policy stance. "We do not expect the CNY exchange rate to be used as a tool to respond to U.S. trade measures, as significant depreciation may undermine domestic households and corporates' confidence in the renminbi and revive capital outflow pressures," Wang Tao, chief economist at UBS in Hong Kong said in a note. "Indeed, we think China is more likely to allow a bit more yuan appreciation to reflect the ongoing weakening of the dollar." Wang added she maintained forecast for yuan to end this year at 6.2 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 96.94, weaker than the previous day's 96.97. The global dollar index fell to 89.607 from the previous close of 89.664. The offshore yuan was trading 0.06 percent firmer than the onshore spot at 6.3125 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 6.4298, 1.70 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0402 GMT:


Item Current Previous Change PBOC midpoint 6.3205 6.3218 0.02% Spot yuan 6.3162 6.324 0.12% Divergence from -0.07%


Spot change YTD 3.02% Spot change since 2005 31.04%


Key indexes:

Item Current Previous Change Thomson 96.94 96.97 0.0

Reuters/HKEX CNH index

Dollar index 89.607 89.664 -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.


Instrument Current Difference

from onshore

Offshore spot yuan 6.3125 0.06% * Offshore 6.4298 -1.70%

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 Sam Holmes)