Yuan nears 2-week low as dollar climbs, Chinese economy cools

SHANGHAI, June 15 (Reuters) - China's yuan fell to a near two-week low against the firming dollar on Friday after the central bank fixed the official midpoint at the lowest in five months, but losses were capped by rising corporate dollar selling. The yuan was also on course for a losing week, with U.S trade threats adding to the risks facing China's already cooling economy. The dollar strengthened against a basket of major currencies to reflect losses in the euro, which was headed for its worst weekly loss in 19 months after a cautious European Central Bank signaled it will keep interest rates at record lows well into next year. Prior to the market opening, the People's Bank of China (PBOC) lowered the midpoint rate to 6.4306 per dollar, the weakest since Jan. 18. The rate was 344 pips or 0.5 percent softer than the previous fix of 6.3962. The move in Friday's fixing was also the biggest one-day weakening in percentage terms since Feb. 9. Reflecting the weaker fixing and strength in the greenback, spot yuan opened at 6.4204 per dollar and was changing hands at 6.4146 at midday, 141 pips weaker than the previous late session close. If the yuan finishes the late night session at the midday level, it would have lost 0.09 percent to the dollar for the week, after gaining 0.16 percent a week earlier. Traders said broad weakness in the euro has piled pressure on the yuan, but the market was still wary of pushing it too far beyond the key 6.4 per dollar level, which is believed to be closely watched by authorities. "Corporate clients continued selling dollars when the yuan was trading weaker than 6.4," said a trader at a Chinese bank in Shanghai. Several traders said their banks' advice to clients was to purchase the greenback above 6.4 and sell when the spot rate eases to below the level.

TRADE RISKS On trade, U.S. President Donald Trump has made up his mind to impose "pretty significant" tariffs and will unveil a list targeting $50 billion of Chinese goods on Friday, an administration official said. Beijing has warned that it was ready to respond. While it is not clear when Trump will activate the measures, rising Sino-U.S. trade tensions will put additional pressure on China's economy, which is starting to show signs of slowing under the weight of a multi-year crackdown on riskier lending. While China's stock markets fell on Friday ahead of the U.S. announcement, foreign exchange traders were taking a wait-and-see approach until more details of the U.S. measures emerge. Washington had published an initial list months ago. Several traders added, that festering trade tensions were likely to put downward pressure on the Chinese currency in the longer term.

POLICY OUTLOOK EYED Separately, markets are abuzz with speculation over the outlook for China's monetary policy after the PBOC unexpectedly chose not to follow Wednesday's U.S. Federal Reserve rate hike, as it has tended to do in the past. The decision to say on hold came on the same day as data which showed China's economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers. Economists at ANZ Bank said they have revised their views on policy move after the PBOC's surprise decision, but stressed there was no need to be overly pessimistic about China's economy. While May's data was soft, ANZ said it was consistent with the view that the economy is slowing gradually, and does not appear to be at risk for now of a sharper slowdown. "We do not interpret PBoCs surprising pause in hiking rates yesterday as monetary policy easing', ANZ said in a note on Friday, noting the central bank did not always follow the Fed in 2017. "We now expect the PBOC to resume rate hikes of 5 basis points (bp) in Q4, followed by another two hikes of 10 bp each in 2019, taking the 7-day reverse repo rate to 2.80 percent by the end of 2019." They also maintained their forecast for another cut in banks' reserve requirement ratio (RRR) "in the near term" to ensure there is ample liquidity in the system. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 98.73, firmer than the previous day's 98.35. The global dollar index rose to 94.97 from the previous close of 94.772. The offshore yuan was trading 0.01 percent weaker than the onshore spot at 6.4153 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 6.5145, 1.29 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0400 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.4306 6.3962 -0.53% Spot yuan 6.4146 6.4005 -0.22% Divergence from -0.25%

midpoint*

Spot change YTD 1.44% Spot change since 2005 29.03%

revaluation

Key indexes:

Item Current Previous Change Thomson 98.73 98.35 0.4

Reuters/HKEX CNH index

Dollar index 94.97 94.772 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

from onshore

Offshore spot yuan 6.4153 -0.01% * Offshore 6.5145 -1.29%

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 Kim Coghill)