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SHANGHAI (Reuters) - Supported by China's central bank raising short term interest rates, the yuan firmed on Thursday as the dollar lost ground all round after the Federal Reserve raised its policy rate while sounding less hawkish about future interest rate increases.
The People's Bank of China set its official yuan midpoint at 6.8862 per dollar prior to the market open on Thursday, 253 pips or 0.37 percent firmer than the previous fixing, the biggest percentage rise in nearly two months.
In the spot market, the yuan opened at 6.8950 per dollar and was changing hands at 6.8937 at midday, 198 pips, or 0.29 percent, firmer than the previous late session close but 0.11 percent weaker than the midpoint.
The offshore yuan was trading 0.34 percent firmer than the onshore spot at 6.87 per dollar.
China's central bank raised short-term interest rates on Thursday morning in what economists said was a bid to stave off capital outflows and keep the yuan currency stable after the Fed raised U.S. rates overnight.
The rise in the short-term rates was more of a market-driven adjustment, some forex traders said, adding that may "provide some support for the Chinese currency".
Ken Cheung, Asian FX strategist at Mizuho Bank in Hong Kong said in a client note that Beijing's latest move to hike the market rates would keep yuan stability.
"The OMO yields hike should be supportive to the CNH side, no matter (whether) it is rate hike or not," he added.
A trader at a Chinese bank in Shanghai noted corporate dollar demand in morning trade, but said the yuan's trend was unclear.
"It is hard to figure out the yuan direction now. The market will still pay close attention to the dollar index performance," the trader said.
The global dollar index fell to 100.62 from the previous close of 100.74.
Traders noted they had not seen major state-owned bank offering much dollar liquidity on Thursday morning but suspected some could emerge when the yuan weakens to around 6.9 level.
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 7.092, -2.90 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
Reporting by Winni Zhou and John Ruwitch; Editing by Simon Cameron-Moore