China's yuan weakens to 3-week low, breaching key threshold

SHANGHAI, Feb 10 (Reuters) - China's yuan weakened past a key threshold to a three-week low against the dollar on Monday, pressured by a buoyant greenback on renewed investor worries over escalating global trade tensions.

Beijing slapped tariffs on U.S. imports last week in an immediate response to new U.S. duties on Chinese goods which President Donald Trump said were aimed at punishing China for not halting the flow of illicit drugs. China's duties are set to take effect on Monday.

Trump said on Sunday he will introduce new 25% tariffs on all steel and aluminum imports into the U.S., on top of existing metals duties.

Looming trade tariffs pushed the dollar higher and weighed on the Chinese yuan, while investors waited to know if there would be a phone call between the leaders of the United States and China.

Trade tension between the world's two largest economies was one of the main drags on the yuan during Trump's first term. The yuan fell more than 12% against the dollar between March 2018 and May 2020.

"The phone call between Trump and Xi has yet to happen and the suspense implies that cautious trading fills the void," said Christopher Wong, FX strategist at OCBC Bank.

"Any sign that both Xi and Trump had a 'good talk' or both countries are working to come to a deal should qualify as a temporary truce and be supportive of sentiments."

As of 0259 GMT, the onshore yuan CNY=CFXS was 0.18% lower at 7.3078 to the dollar, breaching the psychologically important 7.3 per dollar level for first time since January 20.

Its offshore counterpart CNH=D3 followed a weakening trend and slipped 0.11% to 7.3136 per dollar.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1707 per dollar, and 1,343 pips firmer than a Reuters' estimate CNY=RTRS of 7.3050.

The central bank has set its official guidance on the firmer side of market projections since mid-November, which analysts and traders say is a sign of unease over the yuan's decline.

"Keeping the yuan from depreciating would be a sign of goodwill but PBOC may allow the (USD/CNY) fix to rise above the 7.20 at one point should tensions escalate or talks come to an impasse," Maybank analysts said in a note.

"With a multi-front trade war, the U.S. dollar is actually strengthening against most currencies, and not just against the yuan. There is little reason for PBOC to hold the line against such broad market forces."

Apart from trade developments, currency traders said they will pay attention to Federal Reserve Chair Jerome Powell's testimony to the Senate Finance Committee and House Financial Services Committee, and domestic economic data including January credit lending later this week.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -8.90 pips vs. offshore -8.90

• Three-month SHIBOR SHIBOR= 1.7 % vs. 3-month CNH HIBOR 3%

LEVELS AT 0259 GMT: