China's yuan hits 2-1/2-month low as Sino-US trade tensions raise growth fears

SHANGHAI, April 7 (Reuters) - China's yuan slipped to a 2-1/2-month low against the dollar on Monday, dragged down by intensifying trade tensions between the world's two largest economies following tit-for-tat tariffs on each other's goods.

The pace of declines in the yuan was somewhat tempered by the central bank's support, which continued to set the daily official midpoint at a level firmer than market projections.

The onshore yuan CNY=CFXS fell 0.7% to a trough of 7.3192 per dollar in morning trade, the weakest level since January 20, before changing hands at 7.3127 as of 0400 GMT.

Its offshore counterpart CNH=D3 was fetching 7.3237 per dollar at noon, down about 0.39% in Asian trade.

China, which is now facing U.S. tariffs of over 50%, responded on Friday by slapping extra levies on U.S. imports, and global markets are closely watching for any moves by Beijing to allow its currency to weaken.

During Donald Trump's first term as president, the yuan weakened more than 12% against the dollar in the wake of a series of tit-for-tat tariff announcements between March 2018 and May 2020.

Prior to 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 7.1980 per dollar, the weakest level since December 3, 2024 and 1,182 pips firmer than a Reuters' estimate CNY=RTRS of 7.3162.

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.

If the central bank allows the midpoint to weaken below 7.2, the spot rate could fall as far as to about 7.35 per dollar, which would be the bottom end of the 2% band, a level last hit in 2023 that was the weakest since global financial crisis.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said Monday's official midpoint fixing suggested that the authorities will not engineer a sharp currency devaluation to offset tariff hikes.

"The central bank's current strategy looks like it wants to continue to allow the yuan to depreciate against the basket (of trading partners' currencies), while keeping it stable against the dollar," Cheung said.

Khoon Goh, head of Asia research at ANZ, echoed that view, predicting the PBOC would "allow further weakening of the fix but in a measured way as opposed to a large one-off depreciation."

Based on Monday's official fixing, the yuan's value against its trading partners .CFSCNYI fell to 98.46, the lowest level since March 19, according to Reuters calculations based on official data.

China's state-run People's Daily said in commentary on Sunday that China has room to cut reserve requirement ratio and interest rates, and expand fiscal policy to counteract U.S. tariffs.

A weaker yuan could alleviate some pressure on the vast export sector, but a sharp decline could fuel unwanted capital outflow pressure and risk financial stability, some analysts and economists said.

"The 54-percentage-point U.S. tariff rate hike, if stays through the year, could impose a modest downside risk to our USD/CNY forecast of 7.50 by end-2025 and move some depreciation forward to the second quarter of this year," economists at Morgan Stanley said in a note.

"That said, we do not think PBOC would opt for meaningful yuan depreciation as a tool to mitigate tariff shocks ... as policymakers' concerns about self-fulfilling capital outflows with the weaker starting points of China's economic fundamentals and interest-rate differentials with the U.S. this time."

Capital Economics expects the damage to Chinese economy could climb to around 1.0% of GDP in the absence of any exchange rate adjustment.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -4.30 pips vs. offshore -4.30

• Three-month SHIBOR SHIBOR= 1.8 % vs. 3-month CNH HIBOR 2.2 %

LEVELS AT 0400 GMT