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Yuan extends losses, market awaits China reaction to Trump's tariff threats

SHANGHAI, May 7 (Reuters) - China's yuan weakened further against the dollar on Tuesday as investors waited to see how Beijing would respond to fresh tariffs threats from U.S. President Donald Trump, which have thrown trade talks between the two sides into doubt. Markets are watching closely to see if China will still send top negotiator Vice Premier Liu He to Washington this week for further discussions, after Trump unexpectedly announced he will hike U.S. tariffs on Chinese goods from Friday and impose new levies soon. If Liu is part of the delegation, it could signal that "China will make concessions," said Larry Hu, chief China economist at Macquarie in Hong Kong. "If China only sends a junior team to the U.S., the market might have to wait longer to see who blinks first," Hu said. Liu is expected to be in Washington on Thursday and Friday.

Chinese investors, caught off guard by Trump's threats, dumped stocks and sold the yuan on Monday, pushing the currency to a 3-1/2 month low at one point. But markets were somewhat less jittery on Tuesday, amid expectations that Beijing would announce fresh economic support measures if the trade war escalates. Prior to the market opening on Tuesday, the People's Bank of China (PBOC) lowered its official yuan midpoint to a fresh 2-1/2-month low at 6.7614 per dollar, 270 pips, or 0.4 percent, weaker than the previous fix of 6.7344. Tuesday's official fixing was the softest since Feb. 19, and the move was the biggest one-day weakening in percentage terms since Feb. 11. But the guidance rate unexpectedly came in much lower than market expectations. The midpoint was 97 pips weaker than Reuters' estimate of 6.7517. In the spot market, onshore yuan opened at 6.7750 per dollar and was changing hands at 6.7786 at midday, 164 pips weaker than the previous late session close and 0.25 percent softer than the midpoint. "The RMB is likely to have more near-term downside risk with the fading of political goodwill on the currency around the trade negotiation," Anthony Chan, chief Asia investment strategist at Union Bancaire Privée, said in a note. China's foreign ministry said on Monday that its team was still preparing to go to the U.S. for discussions and will work for a win-win agreement for both sides. Stephen Innes, head of trading at SPI Asset Management, said markets have not fully priced in the tariff hikes yet. "Yuan bulls need to be very cautious given the U.S. administration might follow through on its threat to raise the tariff on $200 billion to 25 percent, which is not priced into the currency calculus as the imposition of these additional tariffs could send us veering back to 6.85," he said in a note on Tuesday. The global dollar index fell to 97.444 at midday, from the previous close of 97.515. The offshore yuan was trading at 6.7939 per dollar as of midday.

The yuan market at 0403 GMT:


Item Current Previous ChangePBOC midpoint 6.7614 6.7344 -0.40%Spot yuan 6.7786 6.7622 -0.24%Divergence from 0.25%


Spot change YTD 1.39%Spot change since 2005 22.10%


Key indexes:

Item Current Previous ChangeThomson 95.41 95.53 -0.1

Reuters/HKEX CNH index

Dollar index 97.444 97.515 -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.


Instrument Current Difference

from onshore

Offshore spot yuan 6.7939 -0.23%*Offshore 6.8155 -0.79%

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 Andrew Galbraith; Editing by Kim Coghill)