Yuan stays at strong-side limit until last-minute fall

* Yuan opens at strong-side limit of trading band

* Last-minute weakening reverses the day's gains

* Traders say c.bank intervention possible

* May signal end to stronger fixes to stem appreciation

(Updates to close; adds graphic)

SHANGHAI, Oct 26 (Reuters) - China's yuan hit its strong-side limit with Friday's first trade and firmly hugged the trading band boundary all day until weakening suddenly before the market close.

The yuan opened at the lower limit of 6.2380, its strongest level ever, and held steady until just before 4 pm (0800 GMT), when it dropped to a close of 6.2489, reversing all of the day's gains.

Traders suggested the sudden weakening was due to central bank intervention through state-owned financial institutions, and that it signaled that the People's Bank of China was unlikely to allow the yuan to appreciate further through stronger mid-point fixes. ``We guess that there is a good possibility that the central bank intervened, although we don't fully know the particulars,'' said a trader at a city commercial bank in Shanghai.

The PBOC set its daily midpoint at 6.3010 versus the dollar on Friday morning, the strongest midpoint level since June 20. That granted the yuan more space to appreciate after the currency closed at its strong-side limit of 6.2417 on Thursday.

Thursday marked the first time on record that spot yuan has bumped up against the strong-side limit. The central bank allows the exchange rate to rise or fall by 1 percent from the mid-point it sets each morning. That band was increased from 0.5 percent in April this year.

Some analysts have speculated in recent weeks that the PBOC is intervening to strengthen the currency in response to anti-China rhetoric in the U.S. presidential election campaign.

But recent events suggest that the PBOC's stronger fixings have primarily acted as a restraint against what authorities might consider excessive appreciation, rather than the cause of such appreciation.


Traders say that demand from both corporations and banks is behind the yuan's rally. With the appreciation trend seemingly entrenched, market participants fear delaying their yuan purchases will mean paying a higher price.

``The feeling now is you're going to take losses if you wait,'' said a trader at a mid-sized Chinese bank in Shanghai.

That concern marks a full reversal from earlier this year, when yuan depreciation and the dollar's strength in global markets prompted both corporates and banks to build up their dollar holdings.

The yuan has now gained 2.4 percent since hitting a year low on July 25 and 0.7 percent since the start of 2012.

Indeed, traders say the urgency to trade dollars for yuan stems from the need to unwind long dollar positions that market players built up earlier this year.

``Dealers have also taken on a lot of dollars (earlier this year), but now everyone is inclined to sell them. No one is willing to hold dollars. So there are no bids (for dollars),'' said a trader at a joint-stock bank in Shanghai.

Traders mostly doubt that the yuan hitting its upper limit will prompt the central bank to expand the yuan's daily trading band for a second time in a single year.

A more likely outcome, they say, is incremental reform to the way the midpoint is set. Officially, the midpoint is a weighted average of contributions from all dealers in the China Foreign Exchange Trade System, China's interbank market.

But market players widely view the midpoint as an expression of the central bank's intentions for the currency. The dealer banks whose contributions get the most weight in setting the midpoint are state-owned enterprises subject to government influence.

(Additional reporting by Shanghai Newsroom; Editing by Richard Borsuk)