SHANGHAI, Dec 27 (Reuters) - China's yuan inched lower against the dollar on Friday, pressured by corporate demand for dollars and speculation of a possible cut to bank reserve requirements ahead of the new year. Markets debated whether the central bank would lower the cash banks must hold as reserves any time soon after Premier Li Keqiang said earlier this week the government will consider rolling out more measures, including broad-based and "targeted" cuts in the reserve requirement ratio (RRR) to lower financing costs for the real economy. Late December usually brings worries of a liquidity crunch in China's money market as demand for cash from financial institutions typically peaks before the year-end. But cash conditions this year have been ample, pushing interbank market rates to multi-year lows, and investors are now bracing for a crunch possibly early in the new year.
Prior to market opening on Friday, the People's Bank of China (PBOC) set the midpoint rate at 6.9879 per dollar, 78 pips or 0.11% weaker than the previous fix of 6.9801. In the spot market, onshore yuan opened at 6.9980 per dollar and was changing hands at 6.9989 at midday, 9 pips weaker than the previous late session close. If the yuan finishes the late night session at the midday level, it would have gained a marginal 0.1% to the dollar for the week. But the Chinese currency remains on course for a second losing year amid a protracted trade dispute with the United States, although gains were pared slightly after the two sides reached a first phase trade deal. With many market participants already away for the year-end holidays, trading lacked direction, traders said. Investors preferred to adopt a rangebound trading strategy, with relatively strong demand seen for the greenback at firmer than seven-per-dollar levels, traders said. The yuan's movements will likely track developments in Sino-U.S. trade negotiations and China's economic fundamentals. "The key factor favouring the yuan recently remains the market optimism towards positive progress around the Sino-U.S. trade negotiation," analysts at OCBC Wing Hang Bank said in a note on Friday. China was in close touch with the United States on signing a Phase 1 trade deal, the commerce ministry said on Thursday, adding that both sides were still going through necessary procedures before the signing. The global dollar index fell to 97.431 at midday from the previous close of 97.534. The offshore yuan was trading at 6.996 per dollar as of midday.
The yuan market at 0412 GMT:
Reuters/HKEX CNH index
*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
*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 Brenda Goh; Editing by Jacqueline Wong)