China's yuan hovers near three-week low as Trump's reciprocal tariff deadline looms

SHANGHAI, March 28 (Reuters) - China's yuan hovered near a three-week low against the dollar on Friday and looked set for a second weekly loss, as concerns over worsening trade relations between the world's two largest economies continued to dampen sentiment.

Trade relations with the United States have been a primary focus for investors, as U.S. President Donald Trump is set to impose new reciprocal tariffs on several trading partners starting April 2.

Meanwhile, prospects of a widening yield gap between the U.S. and China also dragged the yuan lower after senior officials at the central bank repeatedly talked about further monetary stimulus.

Xuan Changneng, deputy governor of the People's Bank of China (PBOC), reiterated on Thursday that the central bank would cut the reserve requirement ratio and interest rates at an appropriate time.

Widening yield differentials have been a key factor weighing on the yuan over the past two years, as investors sought higher returns from dollar-denominated assets, putting pressure on the local currency.

As of 0322 GMT, the onshore yuan CNY=CFXS was 0.04% lower at 7.2650 per dollar, not far from a three-week trough of 7.2693 hit on Wednesday.

Its offshore counterpart CNH=D3 traded at 7.2734 yuan per dollar.

Before the market opened, the PBOC set the midpoint rate CNY=PBOC at 7.1752 per dollar, which was 839 pips stronger than Reuters' estimate CNY=RTRS of 7.2591.

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

Khoon Goh, head of Asia research at ANZ, said the PBOC has been keeping the yuan stable in recent months, despite the additional 20% tariffs on Chinese exports to the United States.

"China's reduced direct exposure to the U.S. has likely allowed the authorities to be more deliberate and considered in their response," Goh said.

"But we see this as temporary, and further imposition of tariffs will start to see a currency response."

During Trump's first term, the yuan was permitted to weaken by more than 12% against the dollar amid a series of tit-for-tat U.S.-China tariff announcements between March 2018 and May 2020.

Separately, markets will monitor upcoming economic data including China's March manufacturing activity data due on Monday for more clues on the health of the broad economy.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -12.50 pips vs. offshore -12.50

• Three-month SHIBOR SHIBOR= 1.9 % vs. 3-month CNH HIBOR 2.1 %

LEVELS AT 0321 GMT: