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HONG KONG, March 22 (Reuters) - China's yuan inched down against the dollar as markets turned their attention from the U.S. Federal Reserve's abrupt end to policy tightening this week and instead focused on the economic weakness underpinning that move. The U.S. central bank's decision to shelve an expected interest rate hike this year sent the Chinese currency to its eight-month high just a day earlier as the dollar weakened.
But after the initial euphoria in global markets, caution is prevailing in China's currency and stock markets as investors take a longer look at the risk of a global economic slowdown.
"Investors may be focusing on the rationale behind the Fed and other central banks' dovishness, which is the prospect of slowing growth," said Frances Cheung, Singapore-based head of macro strategy for Asia at Westpac. Spot yuan was changing hands at 6.7036 per dollar at midday, 38 pips weaker than the previous late session close and 0.14 percent softer than the midpoint. The People's Bank of China set the midpoint rate at 6.6944 prior to market open, weaker than the previous fix of 6.6850. The retreat from Thursday's rally attracted some buy orders, including from banks, limiting the downward pressure on the yuan, said a trader at a Chinese bank in Shanghai. The Fed-inspired selloff of the dollar pulled its index against a basket of major peers to a low of 95.74 on Wednesday. It recovered overnight and stood at 96.314 as of midday. "But the renminbi can't fall that much as long as the U.S.-China trade talks are still going on," said this trader, who expects the currency to trade between 6.67 and 6.73 over coming days. On Thursday, Beijing confirmed that trade talks will continue with the United States, with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin visiting China on March 28-29, and Chinese Vice Premier Liu He heading to Washington in April. However, U.S. President Donald Trump raised fresh concerns by threatening to leave the tariffs on Chinese goods for a "substantial period" to ensure that Beijing complies with any trade agreement. Trade-related uncertainties will cap the yuan's room for appreciation, Tommy Xie, an economist at OCBC in Singapore, wrote in a note on Friday. He sees the currency range-bound at 6.7-6.8 per dollar in the near term. The offshore yuan was 0.02 percent firmer from the previous close, but was 0.05 percent weaker than the onshore spot at 6.7070 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 95.54, slightly weaker than the previous day's 95.58.
The yuan market at 4:01AM GMT:
Item Current Previous ChangePBOC midpoint 6.6944 6.685 -0.14%Spot yuan 6.7036 6.6998 -0.06%Divergence from 0.14%
Spot change YTD 2.53%Spot change since 2005 23.46%
Item Current Previous ChangeThomson 95.54 95.58 0.04
Reuters/HKEX CNH index
Dollar index 96.314 96.495 -0.18
*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 6.707 -0.05%*Offshore 6.7325 -0.57%
*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 Noah Sin; Editing by Andrew Galbraith & Shri Navaratnam)