Wires

Yuan slips as Mideast tensions knock emerging market sentiment

HONG KONG, Jan 3 (Reuters) - The yuan eased slightly on Friday as a U.S. air strike on Iranian targets in Iraq spooked emerging market currencies, quelling the cheer from hopes Beijing and Washington will seal an initial trade deal later this month. The Pentagon said on Friday that U.S. attacks "aimed at deterring future Iranian attack plans" killed one of Iran's top military officials, having confirmed to Reuters earlier that it struck two targets in Baghdad. Tensions were already high between the two countries with the storming of the U.S. embassy perimeter in Iraq by pro-Iranian militiamen last week, which followed an American air raid on an Iraqi Shi'ite militia. Oil prices, safe-haven currencies surged while emerging markets weakened. The yuan, however, was only slightly lower against the dollar, which had stooped to 9-week lows against its major peers. The onshore yuan was 0.05% weaker at 6.9678 per dollar at midday while the offshore yuan was off by 0.07% at 6.9664 per dollar. Two traders in Shanghai said the U.S. air strikes had no significant impact on the yuan outlook, which is still largely driven by trade talks and the health of the Chinese economy. "Rising oil prices may eventually translate into pressure on the Chinese economy but that is far from immediate," said one of the traders, who works for a Chinese bank. U.S. President Donald Trump has said that Phase 1 of a trade deal with China would be signed on Jan. 15 at the White House. However, Chinese officials have yet to publicly commit to key items, such as increasing imports of U.S. goods and services by $200 billion over two years. "I think it's a little arbitrary to assume this is going ahead based on the U.S. remarks," said the trader. The yuan is well supported in the short-term should the trade talks progress and policymakers continue with central bank's counter-cyclical support measures, Golden Credit Rating International's analysts wrote in a memo on Friday. The People's Bank of China this week announced the eighth cut since early 2018 in the amount of cash that banks must hold as reserves and a bank official said in an article on Thursday that more such cuts could come. The central bank set the midpoint rate at 6.9681 per dollar prior to market open, near the Reuters estimate of 6.9683.

The yuan market at 4:01AM GMT:

ONSHORE SPOT:

midpoint*

revaluation

Key indexes:

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

from onshore

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 Sam Holmes)