Yuan firms against dollar on hopes of Iran war easing

By Jiaxing Li

HONG KONG, March 25 (Reuters) - China's yuan firmed against the U.S. dollar on Wednesday as the central bank set the fixing stronger, while the greenback stayed subdued on the prospect of a possible ceasefire in the Middle East.

The yuan CNY=CFXS strengthened to as much as 6.8823 against the U.S. dollar, before trading 0.01% higher at 6.8912 at 0300 GMT.

The offshore yuan traded at 6.8943 yuan per dollar CNH=, largely steady in Asian trade.

Sentiment was cautiously optimistic about a possible ceasefire in the U.S.-Israeli war on Iran, which could allow oil shipments to resume out of the Strait of Hormuz. U.S. President Donald Trump said on Tuesday the U.S. was making progress in negotiating an end to the war.

Nevertheless, on Wednesday Israel said it had launched a wave of strikes targeting infrastructure across Tehran, while Iran said it had launched attacks on Israel and U.S. bases in Kuwait, Jordan and Bahrain.

The U.S. dollar index =USD, which measures the greenback's strength against a basket of six currencies, drifted below the 100 level. Oil prices also fell, with Brent crude futures LCOc1 sliding about 5% to just below $100 a barrel.

An appreciating yuan will help soften the impact of rising commodity costs, with the USD/RMB exchange rate expected to continue strengthening toward 6.7 by year end, analysts at China Merchants Securities said in a note.

Prior to the market opening, the People's Bank of China set the midpoint rate CNY=PBOC at 6.8911 per dollar, strengthening for a second consecutive session and closing in on the 35-month peak seen on Friday.

The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

"We do not see the PBoC attempting to reverse CNY appreciation at present," analysts at Barclays said in a note.

There could be significant upside in the CFETS basket in the long run, especially if Middle East uncertainties fade and the dollar risk premium starts to narrow, they added.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -4.75 pips vs. offshore -4.75

• Three-month SHIBOR SHIBOR= 1.5 % vs. 3-month CNH HIBOR 1.7 %

LEVELS AT 0259 GMT