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Yuan steadies as market weighs whether China might sell more US Treasuries

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SHANGHAI, May 16 (Reuters) - China's yuan took a breather on Thursday, barely moving against the U.S. dollar, as the market calmed following some sharp falls stemming from increased Sino-U.S. trade tensions.


The yuan has lost more than 2% since U.S. President Donald Trump said on May 5 he was going to hike tariffs on $200 billion of Chinese imports. Market participants are now looking for cues on whether China will let its currency weaken further.


Traders said the news that the U.S. has hit telecoms giant Huawei with severe sanctions did not move the yuan. Prior to market opening on Thursday, the People's Bank of China (PBOC) set its official yuan midpoint rate to a fresh 4-1/2-month low of 6.8688, 39 pips or 0.06% weaker than the previous fix of 6.8649. It was the softest setting since Dec. 27.


In the spot market, onshore yuan opened at 6.8800 per dollar and was changing hands at 6.8770 at midday, only 2 pips softer than the previous late session close and 0.12% weaker than the midpoint.


Traders said that while the recent official fixings have put the yuan steadily weaker, the decline has been less than the market expected. On Thursday, the midpoint was 9 pips firmer than Reuters' estimate of 6.8697.


"The behavior of the PBOC in recent days around the daily fixing for CNY suggests that the authorities will tightly manage the currency even if it is to go lower," John Velis, FX and macro strategist for Americas at BNY Mellon said in a note.


Market participants are widely discussing whether Chinese authorities would sell more U.S. Treasuries as an effective retaliatory measure against Washington's latest tariff hikes, after official data showed China sold the most Treasuries in almost 2-1/2 years in March. "While this might seem like a plausible threat, we view it as highly unlikely because the costs to China itself would be significant and the upside would be limited," BNY Mellon's Velis said.


Iris Pang, Greater China economist at ING, said whether China would purchase any more Treasuries depends on Washington's "aggressiveness".


"But we believe that China will reserve this option as the last salvo," she said.


Some analysts remain optimistic there could be a deal between China and United States to end the year-long trade war.


"The market is still hoping for a trade agreement, possibly at a meeting of Presidents Trump and Xi at the G20 summit in Osaka on June 28 and 29," said Zhou Hao, analyst at Commerzbank in Singapore, adding he expects the onshore yuan to fluctuate around the 6.9 per dollar level for the time being. The global dollar index fell to 97.535 at midday from the previous close of 97.569.


The offshore yuan was trading at 6.9089 per dollar as of midday.
The yuan market at 0405 GMT:


ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8688 6.8649 -0.06% Spot yuan 6.877 6.8768 0.00% Divergence from 0.12%
midpoint*
Spot change YTD -0.06% Spot change since 2005 20.35% revaluation


Key indexes:
Item Current Previous Change
Thomson 93.86 93.95 -0.1 Reuters/HKEX
CNH index
Dollar index 97.535 97.569 0.0



*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 6.9089 -0.46%
*
Offshore 6.9499 -1.17% 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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