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Yuan rises to new 2-1/2-year high, market expects strength to sustain

    SHANGHAI, Dec 4 (Reuters) - The yuan edged up to a fresh 2
1/2-year high against an easing dollar on Friday, despite fresh
signs of tension between the world's two largest economies.
    Traders said the currency market didn't immediately respond
to the Trump administration's decision to add China's top
chipmaker, SMIC, and oil giant CNOOC to a blacklist of
alleged Chinese military companies, but investors would continue
to closely monitor the developments in Sino-U.S. relations
before President-elect Joe Biden takes office.
    Before the market opened, the People's Bank of China (PBOC)
set the midpoint rate at a two-week high of 6.5507
per dollar, firmer than the previous fix of 6.5592. 
    The onshore spot yuan opened at 6.5430 per dollar
and rose to a high of 6.5391, the strongest level since June 26,
2018. By midday, it was changing hands at 6.5393, 25 pips firmer
than the previous late session close. 
    If the yuan retains all the gains at the late night close,
it would have strengthened 0.6% to the dollar for the week and
brought the year-to-date gain to 6.5%. 
    Meanwhile, the dollar index has fallen 6% this year,
contributing much to the yuan strength. A latest Reuters poll
showed that the dollar's weakening was likely to last at least
another six months as investors continue to shift to risky
assets and higher returns.
    Traders and investors widely believe the yuan could rise
further through the remainder of the year and into 2021. Several
currency traders said many exporters who were hoarding large
amounts of foreign currencies to avoid exchange losses against
the backdrop of recent yuan rallies had to start converting the
greenbacks to the local units to make various payments towards
the year-end, and such dollar-to-yuan conversion could lift the
yuan higher.
    Analysts at Citigroup expect the level of exporters' FX
settlements to return to historical averages, while better
coronavirus containment and resilient trade would maintain the
yuan's continuing appreciation trend into next year.
    But they also pointed out that part of the market
uncertainty could be that the PBOC starts to implement policies
to stabilize the yuan exchange rate amid sharp rallies.
    Other economists believe the yield advantage would sustain
the yuan strength.
    "Coupled with rising global risk appetite and unusually
attractive yields relative to other major markets, this is an
environment conducive for further currency appreciation," Julian
Evans-Pritchard, senior China economist at Capital Economics,
said in a note, expecting the yuan to end 2021 at 6.20 per
dollar.
    The global dollar index fell to 90.692 at midday,
when the offshore yuan was trading at 6.5301 per
dollar. 
    
    The yuan market at 4:02AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.5507   6.5592    0.13%
                                       
 Spot yuan          6.5393   6.5418    0.04%
                                       
 Divergence from    -0.17%             
 midpoint*                             
 Spot change YTD                       6.48%
 Spot change since 2005                26.57%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.19       95.3      -0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    90.692      90.693    0.0
    
*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   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.5301    0.14%
        *                        
 Offshore              6.7052    -2.30%
 non-deliverable                 
 forwards                        
               **                
 
*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 Andrew Galbraith; Editing by
Christopher Cushing and Gerry Doyle)
  
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