China's yuan jumps to 1-1/2 month high on hopes of thaw in Sino-US trade war

SHANGHAI, May 6 (Reuters) - China's yuan leapt to a 1-1/2-month high against the dollar on Tuesday, the first trading session after the holiday, underpinned by investor hopes of a trade deal between the world's two largest economies.

The offshore counterpart CNH=D3, which remained open during the long Labour Day holidays, surged past the psychologically important 7.2 per dollar mark a day earlier to a level last seen in November.

The currency's upsurge comes after President Donald Trump on Sunday said the U.S. was meeting with many countries, including China, on trade deals, and his main priority with Beijing was to secure a fair trade deal.

Beijing had earlier on Friday said it was "evaluating" an offer from Washington to hold talks over Trump's tariffs, although it warned the United States not to engage in "extortion and coercion."

"Hopes of a U.S.-China dialogue and signs of progress on possible trade deals have reinforced the de-escalation thematic," said Christopher Wong, FX strategist at OCBC Bank.

The yuan has faced mounting depreciation pressure after Trump unleashed sweeping reciprocal tariffs on April 2 and imposed 145% duties on Chinese goods, piling pressure on Chinese exporters and hurting the economy.

The onshore yuan CNY=CFXS rose to a high of 7.2223 per dollar at one point in morning deals, the strongest level since March 18. It last traded 0.67% higher at 7.2230 as of 0400 GMT. The offshore yuan CNH=D3 traded at 7.2194 at midday.

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 7.2008 per dollar, its strongest since April 7 but only 6 pips firmer than the previous setting.

"Today's fixing showed that the PBOC is reluctant to see strong appreciation of the yuan," said Becky Liu, head of China macro strategy at Standard Chartered.

"The yuan has been lagging regional peers and we expect a continuation of that," she said, noting possible front-loading foreign exchange demand by overseas listed Chinese companies for their dividend payments and uncertainty around Sino-U.S. trade relations could limit the yuan's gains.

Other low-yielding Asian currencies, including the Hong Kong dollar HKD=D4 and the Taiwan dollar TWD=TP, scored sharp gains this week.

"We think Chinese authorities will not want to see any sharp gain in the yuan ... As reflected in recent PMI data, the trade war is clearly taking its toll and we still believe that China will want to utilise the yuan as a tool to mitigate against trade pressures, alongside fiscal and monetary stimulus."

China's factory activity contracted at the fastest pace in 16 months in April, a factory survey showed, keeping alive calls for further stimulus as Trump's package of tariffs snapped two months of recovery.

LEVELS AT 0400 GMT: