SHANGHAI: China's yuan ended its domestic session at a near two-week high against the dollar on Tuesday, as the central bank's firmer-than-expected midpoint helped to soothe concerns about rising U.S.-China tensions.
Spot yuan finished its onshore session at 7.1105 per dollar, the strongest such close since May 21.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint at 7.1167 per dollar, 0.2pc firmer than previously. Tuesday's midpoint came in again much stronger than market projections, as it has been in the past week.
The yuan is sensitive to developments in Sino-U.S. relations, traders said, and the PBOC's firmer-than-expected daily fixing could be interpreted as an official attempt to keep the currency steady.
"As long as the Phase 1 trade deal is still being implemented, the yuan should be well capped at the stronger side of 7.2 per dollar," said a trader at a Chinese bank.
Market sentiment turned jittery in late trade on Monday after a Bloomberg report, citing sources, said China had ordered major state-run firms to pause some U.S. agricultural goods purchases as Beijing evaluates tensions with Washington over Hong Kong.
Chinese foreign ministry spokesman Zhao Lijan told reporters during a daily briefing Tuesday that he was unaware of the situation.
"Re-escalation of China-U.S. tensions will likely cap the RMB upside while the downside will probably be protected by the status-quo of the Phase 1 deal and the USD decline, leaving the CNH range trading in 7.10-7.20 in the near term," Ken Cheung, chief Asian FX strategist at Mizuho Bank, said in a note.
The offshore yuan was trading at 7.1171 per dollar as of 0835 GMT.
Separately, yuan forwards traded in both onshore and offshore markets jumped after the PBOC said it would buy back loans to spur lending to smaller businesses, raising expectations of a widening yield gap between the world's two largest economies.
Traders interpreted the move as a switch to credit expansion from massive monetary easing by the central bank, meaning less liquidity in the financial system in the near term though it could support the currency for now.