Chinese yuan companies as dollar drops against US rate outlook

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    SHANGHAI, May 18 (Reuters) - China's yuan strengthened on
Tuesday as investors tempered earlier expectations that the U.S.
central bank could hike interest rates soon, weighing on the
dollar.
    But traders said a robust U.S. economic recovery and strong
commodities would put a floor under a falling dollar index.
    "There's likely to be a limit to the downside for the U.S.
dollar," said a trader at a foreign bank, adding that the
greenback was biased toward rangebound fluctuation. "The yuan
also shouldn't have far to run."
    Dallas Federal Reserve President Robert Kaplan on Monday
reiterated that he does not expect interest rates to rise until
next year, fuelling a further decline in bets that inflationary
pressure could force the Fed to act sooner.
    That put a drag on the dollar, which had earlier rallied on
expectations that the Fed could move to raise rates in response
to hotter-than-expected inflation data. The global dollar index
 fell to 90.11 from the previous close of 90.184.
    Before the market open, the People's Bank of China set the
yuan's daily midpoint at 6.4357 per dollar, weaker
than the previous fix of 6.4307.
    Spot yuan opened at 6.4324 per dollar and
strengthened to 6.4278 by midday, 116 pips firmer than Monday's
late session close.
    The offshore yuan firmed to 6.428 per dollar from a
close of 6.4414.
    Ken Cheung, Asian FX strategist at Mizuho Bank, said the
yuan was also helped by China's robust growth momentum and the
country's resilience to the resurgence of COVID-19 infections in
Asia.
    Analysts and traders also say that relatively tight cash
conditions ahead of monthly tax payments due this week continue
to provide some support for China's currency.
    "How tight funds will get depends on how the central bank
offsets," analysts at Jianghai Securities said in a note. "But
even if we rely on the market to self-regulate liquidity levels,
this crunch will not last too long."
    On Tuesday, the volume-weighted average rate of the
benchmark overnight repo traded in the interbank
market was at 2.111%, just shy of more than two-week highs
touched a day earlier.
    
    The yuan market at 4:37AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.4357   6.4307    -0.08%
                                       
 Spot yuan          6.4278   6.4394    0.18%
                                       
 Divergence from    -0.12%             
 midpoint*                             
 Spot change YTD                       1.56%
 Spot change since 2005                28.76%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         97.45       97.4      0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    90.11       90.184    -0.1
 
    
    
*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% from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.428     0.00%
        *                        
 Offshore              6.606     -2.58%
 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 Andrew Galbraith; Additional reporting by Jindong
Zhang; Editing by Sam Holmes)
  



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