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Yuan eases on U.S.-China war of words, firmer fixing caps losses

HONG KONG, June 4 (Reuters) - The yuan edged lower on Tuesday as China and the United States feuded in a war of words over trade and technology transfer, but the Chinese central bank's firm fixing curbed the fall. U.S. President Donald Trump, on a state visit to the UK, is expected to warn his hosts on Tuesday that security cooperation with Washington could be hurt if London allows China's Huawei a role in building parts of the 5G network, the next generation of cellular technology. On Monday, the U.S. Trade Representative's office accused China of pursuing a "blame game" in recent public statements and a weekend white paper that misrepresented the trade negotiations between the world's two largest economies. Weighing on already-strained relations, China warned students and academics on Monday about risks involved in studying in the United States, pointing to limits on the duration of visas and visa refusals. Trump and Chinese President Xi Jinping are due to meet at the G20 meeting in Japan in late-June. The pair are expected to hammer out an agreement to end or de-escalate trade tensions. Spot yuan was changing hands at 6.9079 at midday, 49 pips weaker than the previous late session close and 0.37 percent softer than the midpoint. The yuan traded in a tight range of 111 basis points in the morning session. "There's not much of a trend right now. We see the yuan trading between approximately 6.9 and 6.92 before the summit," said a Shanghai-based trader at a Chinese bank. Mizuho, making a similar observation, sees the currency "in the range trading mode gyrating at 6.9 handle," the bank said in a note on Tuesday. Claudio Piron, a strategist at Bank of America Merrill Lynch, cautioned that weakening the yuan to offset the impact of U.S. tariffs is still on the cards, despite Chinese officials' apparent rejection of the idea. "If a trade deal fails to materialize, CNY depreciation would be a viable and attractive policy option," Piron wrote in a note on Tuesday. Prior to Tuesday's open, the PBOC set the midpoint rate at 6.8822 per dollar, firmer than the previous fix of 6.8896. The fixing is the central bank's main tool to stabilize spot yuan, Iris Pang, economist for Greater China at ING, said in a note on Monday evening. She added that China will unlikely let the yuan slip below 7 per dollar, which could lead to "a depreciation of 1.33% in a single day" and "considerable turmoil in onshore asset markets." In the offshore market, the global dollar index rose to 97.178 from the previous close of 97.142, after sliding overnight on heightening rate cut expectations. The offshore yuan was trading 0.23 percent weaker than the onshore spot at 6.9235 per dollar.

The yuan market at 4:01AM GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 6.8822 6.8896 0.11%Spot yuan 6.9079 6.903 -0.07%Divergence from 0.37%

midpoint*

Spot change YTD -0.51%Spot change since 2005 19.81%

revaluation

Key indexes:

Item Current Previous ChangeThomson 93.35 93.55 -0.2

Reuters/HKEX CNH index

Dollar index 97.178 97.142 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 6.9235 -0.23%*Offshore 6.9698 -1.26%

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 Noah Sin Editing by Jacqueline Wong)