TOKYO, July 29 (Reuters) - China's yuan hit its lowest level against the dollar in more than five weeks on Monday amid corporate dollar buying ahead of Sino-U.S. trade talks this week.
U.S. and Chinese trade negotiators will meet in Shanghai this week for their first face-to-face talks since the two sides agreed a ceasefire in their trade war late last month. But market expectations for any progress are low.
The softer yuan also came after the People's Bank of China set the midpoint of the yuan's daily trading band CNY=PBOC at 6.8821 per dollar prior to market open, weaker than the previous fix of 6.8796.
The weaker fixing followed the global dollar index .DXY hitting a near two-month high of 98.088 on Friday. That index was last at 97.987.
On the spot market, the yuan CNY=CFXS opened at 6.8802 per dollar and weakened to a low of 6.8966, its softest level since June 20. By midday, it had bounced back to 6.8934 per dollar, 134 pips weaker than the previous late session close.
Monday's move was the biggest weakening of the Chinese currency since July 5.
A trader at an Asian bank in Shanghai said that corporate dollar demand was helping to drive the yuan lower.
"It's likely the market may adjust positions ahead of the U.S.-China trade talks," said Qi Gao, Asia FX strategist at Scotiabank in Singapore.
Gao said the weakening of the yuan also reflected the currency catching up following some strengthening of regional currencies. But he downplayed the size of the day's move against the dollar, noting the yuan's relative stability against other currencies.
The Thomson Reuters/HKEX Global CNH index .RXYH, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.89 on Monday, down from 94.08 on Friday.
"I think the PBOC will maintain the dollar-yuan fixing below 6.9 to keep the yuan basically steady," he said, adding that he expects the yuan to remain steady during trade negotiations.
At midday on Monday, the offshore yuan CNH=D3 was trading at 6.8968 per dollar, slightly weaker than the onshore spot.
Offshore one-year non-deliverable forwards contracts (NDFs)CNY1YNDFOR=, considered the best available proxy for forward-looking market expectations of the yuan's value, showed more expectations of a weaker yuan, trading at 6.9305.
The yuan market at 4:12AM GMT:
PBOC midpoint CNY=SAEC
Spot yuan CNY=CFXS
Divergence from midpoint*
Spot change YTD
Spot change since 2005 revaluation
Thomson Reuters/HKEX CNH index
*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
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