China's yuan rebounds from 2007 lows, but slides against trading partners

SHANGHAI, April 11 (Reuters) - China's yuan bounced off a 2007 trough against a weaker dollar on Friday, but it slipped to a 19-month low against currencies of its major trading partners, as a trade war between the world's two largest economies showed few signs of abating.

Selling resumed in financial markets after U.S. President Donald Trump's temporary pause on tariffs for many countries sparked a brief rally a day earlier.

Trump's 90-day respite didn't include China. Instead, he ratcheted up duties on Chinese imports to 145%. Beijing retaliated on Friday by increasing tariffs on U.S. imports to 125%.

The trade war comes at a challenging time for China as policymakers have struggled to revitalise economic growth after the COVID-19 slump, weighed down by a protracted property market downturn and deflationary forces.

However, the People's Bank of China will not allow sharp yuan declines and has instructed major state-owned lenders to reduce dollar purchases, people with knowledge of the matter told Reuters.

A weaker yuan would make Chinese exports cheaper. However, a sharp decline could also increase unwanted capital outflows and risk financial instability, analysts and economists said.

To reflect the broad dollar weakness in global markets, the PBOC lifted its official yuan midpoint guidance fix for the first time in seven days on Friday.

Prior to the market open, the PBOC set the rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.2087 per dollar.

That was 5 pips firmer than the previous fix and 1,017 pips firmer than a Reuters' estimate CNY=RTRS of 7.3104.

The PBOC has slightly loosened its grip on the currency this week by allowing official guidance to weaken past the key threshold of 7.2, although it came in much stronger than market projections, in what traders see as an official attempt to keep the yuan steady.

The onshore yuan CNY=CFXS rebounded from a trough of 7.3518 per dollar hit a day earlier, a level last seen during the global financial crisis, to 7.3245 at the domestic close (0830 GMT). But it remained down 0.9% so far this month.

Its offshore counterpart CNH=D3 was at 7.3219 as of 0830 GMT, down 0.12%. It hit a record low of 7.4288 on Tuesday.

Currency traders said interest in dollar buying remained heavy in both onshore and offshore markets on Friday.

The CFETS yuan basket index .CFSCNYI, which measures the yuan against a basket of currencies, fell to 97.35, the lowest since September 2023, according to Reuters calculations based on official data.

"The impact of weakening the yuan against the dollar to support exports is only a drop in the bucket," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

"On the contrary, weakening the yuan against the basket could enhance the competitiveness of China's exports to non-U.S. countries."

In Hong Kong, the Hong Kong dollar HKD=D4 hovered near a four-year high against the greenback on persistent inflows through the southbound leg of the stock trading link with mainland China. It last traded at 7.7566 to the U.S. dollar around 0830 GMT, closer to the strong side of its trading band of 7.75.

Separately, markets continue to wait and see if China will roll out fresh stimulus to counteract the damage to the economy from the trade war.

"All eyes will be on the China policy response," said Lynn Song, chief economist for Greater China at ING.

"Markets will await signs of policy support in the week ahead. Rate and reserve requirement ratio (RRR) cuts are possible, along with further announcements of fiscal policy plans to support domestic demand."

China is due to release trade data next Monday and its first-quarter gross domestic product data and activity indicators next Wednesday.