SHANGHAI China's yuan slipped against the dollar on Friday as investors braced for a tense first meeting between U.S. President Donald Trump and Chinese President Xi Jinping next week.
Faced with a sharp fall in the yuan last year, Beijing responded by imposing capital controls, and traders see only a small probability of persistent weakening in the currency given a recovering domestic economy and a tighter monetary policy bias.
The spot market opened at 6.9025 per dollar and was changing hands at 6.8956 at midday, 70 pips away from the previous late session close.
Activity in China's manufacturing sector unexpectedly expanded at the fastest pace in nearly 5 years in March, adding to evidence that the world's second-largest economy has picked up momentum early this year, an official survey showed on Friday.
"Today's PMI offers more reason to be optimistic toward the economy, and that means the room for further yuan depreciation could be limited," said a Shanghai-based trader at a foreign lender.
"In addition, the PBOC has been gradually tightening liquidity conditions, without explicitly saying so."
China's foreign exchange regulator said on Thursday that pressure from capital outflows eased somewhat in 2016 and there will be greater flexibility in the yuan's exchange rate in 2017.
Traders also brushed aside the potential impact of U.S. policies on the yuan, and said it is less likely that China will be labelled a currency manipulator by Washington.
Trump has frequently accused China of keeping its currency artificially low against the dollar to make Chinese exports cheaper, keeping markets on edge ahead of Xi's meeting with Trump next week.
Vice Foreign Minister Zheng Zeguang said earlier on Friday that Beijing does not have any policy to devalue its currency to promote exports.
The dollar has strengthened against major global currencies over the past few sessions, with an index tracking the U.S. currency against a basket of major rivals climbing for the fourth straight session to 100.59.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.24, firmer than the previous day's 94.1.
(Reporting by Samuel Shen and John Ruwitch)