SHANGHAI, Aug 31 (Reuters) - The yuan advanced further on Monday and looked set for the best month since January 2019, thanks to solid services sector growth and persistent softness in the U.S. dollar as the Federal Reserve signals it is prepared to hold rates lower for longer.
The dollar .DXY was poised to register its fourth consecutive monthly decline, its longest streak since the summer of 2017. FRX/
Prior to market opening, the People's Bank of China (PBOC) lifted its official yuan midpoint rate CNY=PBOC to 6.8605 per dollar, 286 pips or 0.42% firmer than the previous fix of 6.8891 on Friday, and the strongest since July 2, 2019.
The fixing was still 55 pips weaker than a Reuters' estimate of 6.8550 per dollar.
In the spot market, onshore yuan CNY=CFXS opened at 6.8633 per dollar and was changing hands at 6.8467 at midday, 179 pips firmer than the previous late session close.
If the onshore spot yuan retains all the gains by the late night close, it would have jumped 1.87% on the dollar for the month, booking the biggest monthly advance since January 2019.
Market expectations rose for further yuan strength with many investors building up fresh long positions in the currency after both the onshore and offshore yuan rose past 6.85 per dollar, traders said. Many corporate clients were also selling their long dollars to avoid more exchange losses, they said.
"Technically, the yuan remains in a slow appreciation trend," said Li Liuyang, chief foreign exchange analyst at China Merchants Bank in Shanghai, and pegged the next target at 6.84 per dollar.
Separately, encouraging services sector data also supported the yuan in morning trade, according to traders. China's official manufacturing PMI grew at a slower pace in August as floods across southwestern China disrupts production, but the services sector expanded at a solid rate in a boost to the economy as it continues to recover from the coronavirus shock.
The offshore yuan CNH=D3 rose to a high of 6.8449 at one point on Monday morning, the loftiest level since July 1, 2019. By midday, it was trading at 6.8457 per dollar.
The yuan market at 0400 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% from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
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