(Adds analyst, trader comments, updates prices, recasts throughout) SHANGHAI/HONG KONG, Jan 14 (Reuters) - The yuan raced to its strongest since July on Tuesday, after the U.S. Treasury Department withdrew its designation of China as a currency manipulator, and a day before the signing of a trade agreement between Washington and Beijing. The label - slapped on China at the height of their 18-month long trade dispute last August - was dropped as a Chinese delegation arrived in Washington for the signing of the Phase 1 deal. "While the labelling led to an escalation of U.S.-China tensions, we think the de-labelling has sweetened the 'Phase 1' deal, ensuring its eventual signing. The move signals a de-escalation of the tit-for-tat tariff war, " Citi said in a note. The onshore yuan reacted by climbing 0.38% to 6.8661 per dollar, its firmest since July 11, 2019, leading a rally across Asian currency and equity markets. The offshore yuan climbed to a five-month top of 6.8662 per dollar, extending almost 0.5% gains in the previous session. It was last trading at 6.8750. In early news of the deal, a source said on Tuesday China has pledged to buy nearly an additional $80 billion of manufactured goods from the United States over the next two years, plus just over $50 billion more in energy supplies. The Chinese currency is up 1.3% so far this month amid easing trade tensions, having suffered two years of losses, and could be in for further strengthening as attractive valuations for Chinese assets boost global demand for the tightly-managed yuan. Citi's analysts said they foresee further strength in the Chinese currency with U.S. President Donald Trump's promise to start the next phase of negotiations soon. "(This) may ignite another round of renminbi appreciation expectations, which would attract more bond and equity inflows," they wrote in a note. Yuan bulls may be encouraged by China's central bank's apparent reluctance to curb strength in the currency, said a Shanghai-based trader. Before the start of trade, the People's Bank of China fixed the yuan's trading-band midpoint at its firmest in more than five months. But Wang Tao, chief China economist at UBS, said at a conference, the yuan will likely stay within the range of 6.8 to 7.1 per dollar this year, citing persistent headwinds in economic growth and external uncertainties such as the U.S. presidential election. Data on Tuesday showed China's 2019 total trade declined slightly, although exports rose 0.5% in U.S. dollar terms. Several other traders also said they were unsure if the latest rally would last for much longer. "This wave of appreciation has more or less reached its crest. Factors supporting the yuan are mostly priced in," said a second trader with a foreign bank in Shanghai. "Recently the renminbi has been overbought...there would not be better news (than trade truce) before the start of Chinese New Year" at the end of the month, a third trader said. The yuan market at 5:32AM GMT: ONSHORE SPOT: Item Curren Previou Change t s PBOC midpoint 6.8954 6.9263 0.45% Spot yuan 6.874 6.8925 0.27% Divergence from -0.31% midpoint* Spot change YTD 1.30% Spot change since 2005 20.40% revaluation Key indexes: Item Current Previou Change s Thomson 93.5 93.19 0.3 Reuters/HKEX CNH index Dollar index 97.385 97.345 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 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.875 -0.01% * Offshore 6.9501 -0.79% 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 Andrew Galbraith and Winni Zhou; Writing by Noah Sin; Additional reporting by Rong Ma and Xiao Han in Shanghai; Editing by Shri Navaratnam and Jacqueline Wong)
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