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SHANGHAI, April 26 (Reuters) - China's yuan strengthened against the dollar on Friday, recovering from a two-month low hit in the previous session, after President Xi Jinping pledged to keep the currency stable. If the onshore spot yuan finishes the late night session at the midday level, it would have lost 0.4 percent against the dollar for the week, its biggest such loss since Feb. 15. Friday's gain was the largest in nine days as sentiment recovered following Xi's comments and a much firmer official midpoint fixing set by the central bank, traders said. Xi said China will not resort to currency depreciation and will "continue to improve exchange rate formation mechanism" to keep the currency "basically stable at reasonable and balanced levels." He made the remarks in a keynote speech at a summit on the Belt and Road initiative. "It is partly a gesture as the trade talks appear to be very intense at the moment, while the belt and road forum is ongoing. But more importantly, a stable RMB is helpful in sustaining capital inflows which is much needed as China's current account surplus is narrowing," said Frances Cheung, head of macro strategy for Asia at Westpac in Singapore. Sino-U.S. trade tensions weighed heavily on the yuan for most of last year, but it has clawed back some ground in recent months as Washington and Beijing resumed negotiations aimed at ending the dispute. Face-to-face talks are set to resume in Beijing next week, and U.S. President Donald Trump said on Thursday he would soon host Xi Jinping at the White House, setting the stage for a possible trade agreement. China often looks to steady the yuan during major domestic and international events. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.7307 per dollar, the same as the previous day's fix. Many traders and analysts said Friday's guidance rate unexpectedly came in much higher than market expectations. The midpoint was 63 pips firmer than Reuters' estimate of 6.7370. Stephen Chi, FX and rates strategist at China Construction Bank (Asia) in Hong Kong, said the central bank was possibly trying to filter out the impact of excessive volatility following sharp losses in the yuan in the previous session. "Therefore, the USD/CNY and USD/CNH are likely to trade sideways on Friday, capped at below 6.75 per dollar level," Chiu said in a note. The onshore yuan fell to a low of 6.75 at one point on Thursday, hammered by broad strength in the dollar. The global dollar index, a gauge that measures the unit's strength against six other major currencies, surged to the highest level since May 2017. It still held steady close to a two-year high on Friday. Several traders told Reuters on Thursday that they saw major state banks selling dollars onshore in the morning, in an apparent attempt to put a floor under the yuan. But traders said they did not similar moves on Friday. Xie Yaxuan, chief economist at China Merchants Securities, said he does not expect the rallies in the dollar to bring too much pressure to emerging market currencies. "The strength in the dollar index is more of reflecting the relative relationship between the United States and Europe," Xie said. Global investors are also looking to U.S. gross domestic product (GDP) later in the day for clues on the dollar's direction. The global dollar index was trading at 98.144 at midday, compared with the previous close of 98.203.
The offshore yuan was trading at 6.739 per dollar as of midday.
The yuan market at 0350 GMT:
Item Current Previous ChangePBOC midpoint 6.7307 6.7307 0.00%Spot yuan 6.734 6.7448 0.16%Divergence from 0.05%
Spot change YTD 2.06%Spot change since 2005 22.91%
Item Current Previous ChangeThomson 96.27 96.16 0.1
Reuters/HKEX CNH index
Dollar index 98.144 98.203 -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.
OFFSHORE CNH MARKET
Instrument Current Difference
Offshore spot yuan 6.739 -0.07%*Offshore 6.7661 -0.52%
*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)