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China's yuan hits 1-week high after strong official fixing, Fed decision

SHANGHAI, March 22 (Reuters) - China's yuan rose to a one-week high against the dollar on Thursday, underpinned by a strong official fixing and weakness in the greenback after the U.S. Federal Reserve did not indicate faster monetary tightening this year as some had expected. The dollar eased versus a basket of currencies as the Fed raised rates by a quarter of a percentage point to a range of 1.50 percent to 1.75 percent, and forecast at least two more hikes for 2018 instead of a total four that some currency bulls had hoped for. China gingerly raised a key short-term interest rate on Thursday, hours after the Fed's move overnight, in a symbolic reminder that Beijing was keeping an eye on global market trends even as it cracks down on financial risks at home. The People's Bank of China (PBOC) increased the interest rate on seven-day reverse repurchase agreements, or reverse repos, used to control liquidity in the banking system, by 5 basis points (bps). Yuan traders said the move by the PBOC was expected and had not affected the foreign exchange market sentiment. Prior to market opening, the PBOC lifted its official yuan midpoint to 6.3167 per dollar, the strongest since March 15. The official yuan midpoint was 229 pips, or 0.36 percent, firmer than Wednesday's fix of 6.3396. The move in the official guidance rate was the biggest one-day strengthening in percentage terms since Feb. 27. In the spot market, the onshore yuan opened at 6.3196 per dollar and was changing hands at 6.3190 at midday, 94 pips firmer than the previous late session close. Traders said the yuan was reacting to losses in the dollar, but gains were capped as some corporate clients rushed to get cheaper dollars. Market watchers said Chinese central bank's mild rate hike decision suggested the authorities were not worried too much about the foreign exchange rate. "A 5 bps hike is enough because yuan depreciation is not a big concern. And the PBOC is refraining from lifting rates aggressively amid the regulation reform and benign inflation pressure," said Ken Cheung, senior FX strategist at Mizuho Bank in Hong Kong. Cheung expects the PBOC to continue in lockstep with its U.S. counterpart on further tightening this year. Julian Evans-Pritchard, senior China economist at Capital Economics also said in a note that the PBOC's rate decision was seeking to "minimise capital outflows and downward pressure on the renminbi". The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.03, versus the previous day's 97.23. The global dollar index fell to 89.528 from the previous close of 89.783. The offshore yuan was trading 0.10 percent firmer than the onshore spot at 6.3130 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 6.4316, 1.79 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0406 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.3167 6.3396 0.36% Spot yuan 6.319 6.3284 0.15% Divergence from 0.04%

midpoint*

Spot change YTD 2.97% Spot change since 2005 30.98%

revaluation

Key indexes:

Item Current Previous Change Thomson 97.03 97.23 -0.2

Reuters/HKEX CNH index

Dollar index 89.528 89.783 -0.3

*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 6.313 0.10% * Offshore 6.4316 -1.79%

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 Himani Sarkar)