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Yuan rises again on trade talks optimism, on track for best week since 2005

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SHANGHAI, Jan 11 (Reuters) - China's yuan extended its sharp gains against the U.S. dollar into a third day on Friday, reaching its strongest level in 5-1/2 months and ensuring that this week will be its best since 2005.


Friday's advance was supported by a weaker dollar and by news that United States-China trade negotiations will move to a higher level, boosting optimism their disputes can be ameliorated.


Markets had initially been "very bearish" on Sino-U.S. talks, but news that Vice Premier Liu He will visit Washington raises hopes the deadline for dispute resolution by the start of March "could be extended to reach a ceasefire deal", said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong. Cheung added that the gains in the yuan was also supported by stop loss sales of weaker dollar amid rising expectations the Federal Reserve will not hike U.S. interest rates this year.


Prior to market opening on Friday, the People's Bank of China (PBOC) set the midpoint rate at 6.7909 per dollar, the strongest since July 26, and 251 pips or 0.37 percent firmer than the previous fix of 6.816.


In the spot market, the onshore yuan opened at 6.7880 per dollar, rose to a high of 6.7481 - the highest level since July 26 - before changing hands at 6.7482 at midday. That was 408 pips stronger than the previous late session close and 0.63 percent firmer than the midpoint.


If the yuan finishes the late night session at the midday level, it would have gained 1.8 percent for the week, the best weekly performance since July 2005 - when Beijing took the Chinese currency off a fixed dollar peg and revalued it.


Yuan traders started offloading long dollars in their proprietary accounts on Thursday following the wrap-up of three-day U.S.-China trade talks in Beijing. Markets treated absence of any bad news from those negotiations as good news.


"Some corporate clients were joining to sell their dollars," said a trader at a foreign bank in Shanghai.


Analysts at China Construction Bank (Asia) in Hong Kong said they expect the strong momentum of the yuan to continue in the rest of Friday's session.


However, some market watchers pointed out that China on Monday starts to release December economic data, which is widely expected to show the broad domestic economy was slowing, which would not support further strengthening for the yuan.


In global markets, the dollar index fell to 95.353 at midday from the previous close of 95.539.


Fed Chairman Jerome Powell reiterated on Thursday the U.S. central bank has the ability to be patient on monetary policy given that inflation remains stable. Markets are now pricing in no further rate hikes by the Fed this year. At midday, the offshore yuan was trading at 6.7476 per dollar.
The yuan market at 0507 GMT:


ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.7909 6.816 0.37% Spot yuan 6.7482 6.789 0.60% Divergence from -0.63%
midpoint*
Spot change YTD 1.85% Spot change since 2005 22.65% revaluation


Key indexes:
Item Current Previous Change
Thomson 94.4 93.78 0.7 Reuters/HKEX
CNH index
Dollar index 95.353 95.539 -0.2



*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 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET

Instrument Current Difference from onshore Offshore spot yuan 6.7476 0.01%
*
Offshore 6.7731 0.26% 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 Winni Zhou and John Ruwitch; Editing by Richard Borsuk)

Messaging: winni.zhou.thomsonreuters.com@reuters.net))
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