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SHANGHAI, June 6 (Reuters) - China's yuan inched lower against the dollar on Thursday, weighed by rising corporate demand for the greenback and set for a second losing week. China's financial markets will be closed for the Dragon Boat Festival on Friday. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8945 per dollar, 42 pips or 0.06 percent weaker than the previous fix of 6.8903. In the spot market, the onshore yuan opened at 6.9111 per dollar and was changing hands at 6.9129 at midday, 39 pips weaker than the previous late session close and 0.27 percent softer than the midpoint. If the onshore yuan finishes the late night session at the midday level, it would have lost 0.13 percent to the dollar this week. It posted its worst month in ten in May amid escalating trade tensions between the world's two largest economies. Trading was thin in the morning session as many market participants squared their positions for proprietary trades ahead of the long weekend. Several traders said a softer dollar in global markets should be lending support to the Chinese currency, but rising seasonal corporate demand and bargain hunting hampered gains. A trader at a Chinese bank said that unlike its emerging market peers, the yuan was trading weaker. Chinese companies listed offshore usually start making foreign exchange purchases for dividend payments starting in June. Such demand could pile pressure on the yuan. Many onshore yuan traders expect the renminbi to continue trading in a tight range, and firmer than 6.92 per dollar. A second trader at a foreign bank said the European Central Bank's rate decision later on Thursday could trigger volatility in major currencies. The latest Reuters poll of 60 institutions conducted from May 30-June 5 showed the yuan is forecast to gain about 1.5% to 6.80 per dollar in a year as the monetary authorities keep a tight leash on the currency and prevent it from falling through the psychological 7 per dollar level any time soon. Separately, boosting liquidity to the financial system on Thursday, China's central bank signalled its readiness to supply smaller banks with a steady stream of cash after the takeover of a troubled lender, letting more banks access the funds.
The PBOC lent 500 billion yuan ($72.34 billion) to financial institutions via its medium-term lending facility (MLF), offsetting 463 billion yuan worth of MLF loans maturing on the same day. In global markets, the dollar index fell to 97.275 at midday from the previous close of 97.32. It hit a two-month low of 96.749 in the previous session on heightened prospects of the Federal Reserve cutting interest rates. The offshore yuan was trading at 6.9293 per dollar as of midday.
The yuan market at 0432 GMT:
Item Current Previous ChangePBOC midpoint 6.8945 6.8903 -0.06%Spot yuan 6.9129 6.909 -0.06%Divergence from 0.27%
Spot change YTD -0.58%Spot change since 2005 19.73%
Item Current Previous ChangeThomson 93.3 93.23 0.1
Reuters/HKEX CNH index
Dollar index 97.275 97.32 -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 6.9293 -0.24%*Offshore 6.9752 -1.16%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
($1 = 6.9117 Chinese yuan)
(Reporting by Winni Zhou and John Ruwitch)