Yuan steady as markets weigh trade war escalation, PBOC support

By Jiaxing Li

HONG KONG, March 14 (Reuters) - China's yuan held steady against the U.S. dollar on Friday as markets weighed escalating global trade tensions against Beijing's promises of more fiscal and monetary support for the economy.

U.S. President Donald Trump on Thursday threatened to slap a 200% tariff on wine, cognac and other alcohol imports from Europe, opening a new front in a trade war that has roiled financial markets and raised recession fears.

That comes after a European Union plan to impose tariffs on American whiskey and other products next month -- which itself is a reaction to Trump's 25% tariffs on steel and aluminium imports that took effect on Wednesday.

The U.S. and China exchanged tit-for-tat tariffs in recent weeks, and more U.S. moves are expected.

By 0240 GMT, the yuan CNY=CFXS was 0.07% lower at 7.2493 to the dollar, 53 pips lower than the previous late session close.

Still the currency is up 0.5% against the dollar this month and 0.7% firmer this year, as the greenback rally lost steam with the U.S. expectionalism trade faltering on concerns that tariffs will fuel inflation and dampen growth.

The greenback has fallen more than 5% since climbing to a six-month peak back in January, and the dollar's six-currency index =USD was slightly firmer at 104.01 on Friday.

Prior to the market opening, the People's Bank of China set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, 725 pips firmer than a Reuters' estimate.

The central bank said on Thursday it would cut interest rates and banks' reserve requirement ratio at the appropriate time and keep liquidity ample, reiterating its stance.

It also vowed to strengthen guidance on expectations and drive a lowering of social financing costs, according to the summary of a meeting chaired by Pan Gongsheng, the bank's governor.

"We believe that China will stick to a stable yuan policy," Magdalene Teo, fixed income analyst Asia at Julius Baer wrote in a note.

Traders say recent daily fixings by the PBoC show that it prefers a stable yuan and is willing to act to temper yuan strength as well as weakness. But the room for yuan appreciation will be limited given the government's ambitious growth target of around 5% and the expected hit on exports from U.S. tariffs.

Trump said earlier this month that he had told the leaders of Japan and China they cannot continue to reduce the value of their currencies as doing so would be unfair to the United States.

The offshore yuan traded at 7.2512 yuan per dollar CNH=, down about 0.04% in Asian trade.

Chinese government 10-year bond yields CN10YT=RR fell 1.1 basis points to 1.91%. The yield on similar U.S. government benchmark debt was 4.3%. The yuan onshore 7-day benchmark repo rate was at 1.84%.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -17.00 pips vs. offshore -17.00

• Three-month SHIBOR SHIBOR= 2 % vs. 3-month CNH HIBOR 2.2 %

LEVELS AT 0239 GMT