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SHANGHAI: China's yuan inched up against the dollar on Friday as the U.S. currency came under pressure after a Federal Reserve official bolstered market bets of an interest rate cut later this month.

New York Fed President John Williams said on Thursday that policymakers need to add stimulus early to deal with too-low inflation when interest rates are near zero and cannot wait for economic disaster to unfold to act.

The remarks helped cement expectations for a U.S. interest rate cut at the July 30-31 policy meeting, traders said, leaving the dollar in a tough battle with bears.

Yuan market sentiment also improved after U.S. and Chinese officials spoke by telephone on Thursday, seeking to end a year-long trade war, with U.S. Treasury Secretary Steven Mnuchin suggesting in-person talks could follow.

The easing dollar led the People's Bank of China (PBOC) to set the midpoint rate at 6.8635 per dollar prior to market open, the strongest since July 2. It was 26 pips, or 0.18 percent, firmer than the previous fix of 6.8761.

In the spot market, onshore yuan opened at 6.8755 per dollar and was changing hands at 6.8736 at midday, 69 pips firmer than the previous late session close.

If the onshore spot yuan finishes the late night session at the midday level, it would have gained a marginal 0.1 percent on the dollar for the week for second straight weekly gain.

Traders said selling interest in the dollars emerged in morning trade following the Fed official's comments and some positive news headlines on the trade negotiations.

Market will remain focused on developments in the Sino-U.S. trade talks, said a trader at a Chinese bank, noting huge uncertainty around whether both sides are able to pull off a durable deal. Those uncertainties were underscored earlier in the week when U.S. President Donald Trump reiterated a threat to slap tariffs on more Chinese goods.

"Range trading is likely to continue, around 6.84/6.90," Frances Cheung, head of Asia macro strategy at Westpac in Singapore said in a note.

The yuan also appeared to be underpinned by signs of some tightness in the money market, despite the fading seasonal impact of tax payments.

Companies had to make their quarterly tax payment earlier this week, which usually suck cash out of the market.

The global dollar index traded at 96.817 at midday from the previous close of 96.794.

The offshore yuan was trading at 6.874 per dollar as of midday.

Copyright Reuters, 2019