China's yuan holds firm as traders await US-China talks

HONG KONG, June 5 (Reuters) - China's yuan hovered around its strongest level against the U.S. dollar in nearly two weeks on Thursday, buoyed by persistent weakness in the greenback as markets awaited further clarity on trade negotiations and potential tariff developments.

The yuan CNY=CFXS eased 0.1% after touching 7.1720, its strongest since May 26. Its offshore counterpart CNH= was also down about 0.1% in Asian trade.

Investors were cautious after U.S. President Donald Trump said Chinese President Xi Jinping was tough and "extremely hard to make a deal with". Markets are now awaiting the results of a phone call between the two leaders this week and any further insights into potential tariff developments.

Prior to the market opening, the People's Bank of China set the midpoint rate CNY=PBOC at 7.1865 per dollar, 103 pips weaker than a Reuters estimate, signalling the central bank's intent to maintain stability in the yuan and temper rapid appreciation.

The spot yuan is allowed to trade 2% either side of the fixed midpoint each day. Based on Thursday's official guidance, the yuan is allowed to drop as far as 7.3302.

The currency is up 0.3% against the dollar this month and 1.6% firmer this year as broad weakness in the U.S. dollar adds to the strengthening trend.

"Looking beyond near-term tariff headlines, we think the CNY may now be commencing a multi-year strengthening path against the USD," analysts at Goldman Sachs wrote in a note.

Elsewhere, the Hong Kong dollar HKD=D3 remained near the weak end of a band around 7.85 to the dollar. The overnight interbank offered rate HIHKDOND= rebounded to 0.01949% from a record low in the biggest single-day increase since 2023, while interbank rates for one-month HIHKD1MD= and three-month HIHKD3MD= continued to hover near three-year lows.

The dollar's six-currency index =USD was stuck near a six-week low, after data showed that the U.S. services sector had contracted for the first time in nearly a year, reigniting concerns about sluggish growth and persistent inflation.

Key onshore vs offshore levels:

* Overnight dollar/yuan swap onshore -5.70 pips vs. offshore -5.70

* Three-month SHIBOR SHIBOR= 1.7% vs. 3-month CNH HIBOR 1.8%