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China's yuan dips, but set for best week in 6 on trade hopes

SHANGHAI, Feb 22 (Reuters) - China's yuan inched lower against the U.S. dollar on Friday but looked set for its biggest weekly gain since early January, supported by optimism that Washington and Beijing may be nearing a deal that could end their trade war. Reuters reported exclusively on Thursday that the two sides are starting to sketch out an agreement on structural issues, drafting language for six memorandums of understanding on proposed Chinese reforms. Sources said the two sides remain far apart on some U.S. demands, but investors hope that a framework deal would at least lead to a further postponement of a scheduled U.S. tariff hike that could inflict far greater damage on China's slowing economy. Still, further upside for the yuan could be limited, as traders said markets have already largely factored in a positive outcome in the trade negotiations. Traders said some companies were bargain hunting on Friday morning, selling yuan for dollars which dragged spot yuan lower. Prior to the market opening on Friday, the People's Bank of China (PBOC) set the midpoint rate at 6.7151 per dollar, the strongest since Feb. 1 and 69 pips or 0.1 percent firmer than the previous fix of 6.7220. In the spot market, the onshore yuan opened at 6.7300 per dollar and was changing hands at 6.7296 at midday, 98 pips weaker than the previous late session close and 0.22 percent softer than the midpoint. If the yuan finishes the late night session at the midday level, it would have gained 0.7 percent for the week, the biggest weekly gain since Jan. 11. The yuan lost 0.61 percent a week earlier. "The dollar remains hovering at high levels in global markets, while momentum of continued yuan rises is not strong given the economic fundamentals," said a trader at a Chinese bank, expecting the yuan was likely to swing between 6.7 to 6.8 per dollar for now. A second trader said corporate interest in buying dollars emerged at around the key 6.7 per dollar level. The yuan's rally picked up steam on Wednesday following a Bloomberg report which said the United States was pressing China to pledge not to devalue the yuan as part a deal to end their trade dispute. Lu Ting, chief China economist at Nomura in Hong Kong, said requiring China to keep a stable yuan, whether against the dollar or a basket of currencies, would do "much more harm than good" to both nations. "Given the sharp divergence between GDP growth rates, inflation rates, monetary policies and other socio-economic characteristics, the best exchange rate policy for both China and the U.S. is to further de-peg the yuan from the dollar and encourage Beijing to further reform its exchange rate regime towards a free-floating one," Lu said in a note on Friday. "A clause pressuring China to maintain a 'stable' yuan is neither sensible nor practical. Furthermore, even if it is included as a clause in the trade deal, China is unlikely to hamstring itself with absolute compliance to such a policy." The dollar held gains against its peers early on Friday, bolstered by a rise in U.S. yields. The global dollar index rose to 96.62 at midday, from the previous close of 96.605. The offshore yuan was trading at 6.731 per dollar as of midday.

The yuan market at 0423 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 6.7151 6.722 0.10%Spot yuan 6.7296 6.7198 -0.15%Divergence from 0.22%

midpoint*

Spot change YTD 2.13%Spot change since 2005 22.99%

revaluation

Key indexes:

Item Current Previous ChangeThomson 95.32 95.49 -0.2

Reuters/HKEX CNH index

Dollar index 96.62 96.605 0.0

*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 6.731 -0.02%*Offshore 6.747 -0.47%

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)