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Yuan clocks first weekly gain in three on trade hopes, dollar sale

(Adds closing price, trader comments)

HONG KONG/SHANGHAI, Sept 6 (Reuters) - The yuan had its first weekly gain in three weeks on Friday, buoyed by hopes Beijing and Washington will find a way to de-escalate tensions after trade negotiators from both sides agreed to meet in Washington in October.

The yuan finished domestic trading at 7.1243 per dollar, the strongest such close in two weeks. It was up almost 0.5% week-on-week.

The currency had its worst month in 25 years in August as China and the United States ramped up the trade war.

The People's Bank of China appears to have used the daily fixing to brake the yuan's decline. It set the yuan's daily midpoint - the spot rate can trade 2% either side - at 7.0855 per dollar, stronger than the Reuters' estimate of 7.1003.

"This reflects the central bank's attitude at this stage to keep the yuan relatively stable," said a currency trader in Shanghai. "Moving forward, (the exchange rate) will depend on supply and demand and how the trade talks go."

With the Chinese National Day on Oct. 1, Beijing was unlikely to escalate the trade war further and should keep the yuan stable, said another trader at a Chinese bank in Shanghai.

Two other traders in the city said the currency extended its advance on Friday afternoon because a few large banks started selling dollars for yuan, setting off a domino effect of yuan purchases.

The dollar was bolstered earlier on Friday by encouraging U.S. economic data, which could also be supportive for the yuan as it reduced some gloom over the global economy, but analysts said it could also push back expectations for U.S. interest rate cuts and give U.S. negotiators confidence to drive a harder bargain in the trade talks.

"A relatively stronger U.S. economy is viewed as counterproductive for trade talks because it encourages U.S. President Trump to play hardball and push back Fed cut expectations," DBS bank analysts said in a note.

The offshore yuan was firmer by about 0.25% at 0830 GMT at 7.1192 per dollar.

It briefly pared about 40 pips after the PBOC announced an anticipated cut in banks' reserve requirement ratios (RRR) in late afternoon, before regaining lost ground.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 91.30, up from Thursday's close of 91.01.

(Reporting by Noah Sin and Jindong Zhang; Editing by Jacqueline Wong)