China's yuan hovers near 3-month low on Fed tightening, geopolitical tensions

    SHANGHAI, Aug 18 (Reuters) - China's yuan hovered near a
three-month low against a firmer dollar on Thursday after
minutes from the latest Federal Reserve policy meeting pointed
to higher U.S. interest rates to tame inflation.
    The dollar held gains after Fed officials saw "little
evidence" late last month that U.S. inflation pressures were
easing, the central bank's July meeting minutes showed.

    Fed monetary tightening could further lift the dollar and
pressure other major currencies, as money would flow to
dollar-denominated assets.
    Such hawkishness could particularly hurt the yuan as the
People's Bank of China (PBOC) is set to take more easing steps,
pressured by a shaky economy that is undercutting jobs. But it
faces limited room to manoeuvre due to worries over rising
inflation and capital flight, policy insiders and analysts said.

    The onshore spot yuan opened at 6.7760 per dollar
and was changing hands at 6.7863 at midday, 58 pips weaker than
the previous late session close, not far from a three-month low
of 6.7978 hit on Tuesday.
    Prior to market opening, the PBOC set the midpoint rate
 at 6.7802 per dollar, 61 pips or 0.09% firmer than
the previous fix 6.7863. 
    Currency traders and analysts said the yuan's weakness in
morning deals was also reflecting a possible escalation in
Sino-U.S. tensions over Taiwan after Washington and the island
agreed to start trade talks under a new initiative.
    "We see a risk of yuan depreciation possibly gathering
momentum on a lethal combination of deteriorating macro backdrop
and geopolitical tensions ahead of key political events such as
the Party Congress and the U.S. mid-term election," analysts at
Maybank said in a note.
    Such concerns over regional geopolitical tensions and the
PBOC's dovish stance in light of this week's surprise cuts to
two key rates prompted some investment banks including Standard
Chartered to revise down their yuan forecasts.
    "Although we continue to see a stronger CNY before year-end
on China-U.S. growth divergence, a possibly weaker USD and a
still-healthy trade surplus, the policy shift may curb the
downside for USD/CNY in the near term," said Becky Liu, head of
China macro strategy at Standard Chartered.
    Liu cut her forecast for the yuan to trade at 6.75 per
dollar at end-Q3 from 6.65 previously, while maintaining
year-end view of 6.6.
    Markets also widely expect the country's benchmark lending
loan prime rate (LPR) to be lowered at the monthly fixing next
    By midday, the global dollar index rose to 106.665
from the previous close of 106.574, while the offshore yuan
 was trading at 6.8015 per dollar. 

    The yuan market at 0351 GMT: 
 Item               Current  Previous  Change
 PBOC midpoint      6.7802   6.7863    0.09%
 Spot yuan          6.7863   6.7805    -0.09%
 Divergence from    0.09%              
 Spot change YTD                       -6.36%
 Spot change since 2005                21.96%
    Key indexes:
 Item            Current     Previous  Change
 Thomson                               0.0
 CNH index                             
 Dollar index    106.665     106.574   0.1
*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

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.8015    -0.22%
 Offshore              6.7207    0.89%
*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 Brenda Goh; Editing by Jacqueline