March 15, 2017 / 5:04 AM / 5 months ago

China's yuan weakens, awaits Fed rate decision

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016.Kim Kyung-Hoon

SHANGHAI (Reuters) - China's yuan traded in a tight range on Wednesday, weakening slightly against the dollar, ahead of a U.S. Federal Reserve meeting that could provide hints on how much monetary tightening to expect for the remainder of the year.

The People's Bank of China set the midpoint rate at 6.9115 per dollar prior to the market opening, which was firmer than Tuesday's rate of 6.9118.

Investors awaited the outcome of the Fed's two-day meeting, which ends later on Wednesday. The U.S. central bank is widely expected to hike interest rates by 25 basis points.

With a March rate hike already priced in, Chinese traders said they were focussing more on any signals Fed Chair Janet Yellen provides afterwards on the potential for further tightening later in the year.

In the spot market, the yuan opened at 6.9130 per dollar and settled at 6.9146 at midday, only seven pips weaker than the previous late session close and 0.04 percent softer than the midpoint.

"The overall market was calm in the morning with slightly stronger dollar demand by companies," said a trader at a foreign bank in Shanghai.

Two traders noted that major state-owned banks sold dollars in the onshore market on Tuesday afternoon after the yuan breached 6.92 per dollar at one point, in an apparent attempt to stop the currency from falling too fast.

The market shrugged off a speech by Chinese Premier Li Keqiang delivered at the end of the National People's Congress on Wednesday.

Li reiterated that the yuan would remain basically stable, while China's foreign exchange reserves were sufficient for paying imports and foreign debts.

He also said that Beijing did not want to see a trade war with the United States and urged talks between both sides to achieve common ground.

Chinese authorities want to carefully manage the yuan exchange rate to achieve currency stability against both the basket and the U.S. dollar, Wang Tao, chief China economist at UBS said in a note.

"While we expect increasing trade frictions between the U.S. and China, we now think it unlikely that the U.S. government will label China a currency manipulator and apply a blanket tariff on Chinese goods this year," said Wang, who expected the yuan to weaken to 7.15 per dollar by the end of this year.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.16, firmer than the previous day's 95.1.

The global dollar index fell to 101.67 from the previous close of 101.7.

The offshore yuan was trading 0.20 percent firmer than the onshore spot at 6.9005 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.135, 3.13 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

Reporting by Winni Zhou and John Ruwitch; Editing by Randy Fabi

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