China's yuan slips to fresh 3-week low on trade worries

SHANGHAI, Feb 12 (Reuters) - China's yuan slipped to a new three-week low against the dollar on Wednesday, as investors cautiously awaited more developments in increasingly fraught global trade relations.

U.S. President Donald Trump raised tariffs on steel and aluminum imports to 25% on Monday, and said he would announce reciprocal tariffs over the next two days.

Looming trade tariffs pushed the dollar higher and pressured other major currencies, including the yuan.

And many market participants worried that China would be exposed to further tariff hikes following a 10% duty charged on goods imported from China given its huge trade surplus with the United States.

Trade tension between the world's two largest economies was one of the main drags on the yuan during Trump's first term. The yuan fell more than 12% against the dollar between March 2018 and May 2020.

As of 0313 GMT, the onshore yuan CNY=CFXS was 0.03% lower at 7.3079 to the dollar after touching a trough of 7.3123, the weakest level since January 20.

The offshore yuan CNH=D3 traded at 7.3115 yuan per dollar.

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 7.1710 per dollar, and 1,261 pips firmer than a Reuters' estimate CNY=RTRS of 7.2971.

Based on Wednesday's official guidance, the yuan is allowed to drop as far as 7.3144.

"The PBOC has been restraining USD/CNY below the 7.35 cycle high amidst broad dollar strength through the daily onshore fixes among other methods," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

"However, the PBOC will need to cut (interest) rates further to support growth. The widening rate spread against the U.S. dollar is a fundamental headwind for the renminbi, even before higher tariffs."

The yuan hit a low of about 7.35 per dollar in 2023, the softest level since the global financial crisis of 2008, weighed down by a combination of a widening yield differential with the United States and a slowing Chinese economy.

Many market watchers believe any sharp depreciation beyond that key level could mean China is loosening its grip on the currency.

The PBOC said on Wednesday that it will sell a total of 60 billion yuan $8.21 billion) worth of bills in Hong Kong on Friday, compared with a maturity of 45 billion yuan in February.

Selling such yuan bills will mop up liquidity in the market and stabilise the yuan currency.

Traders said they will quickly shift their attention to U.S. inflation data due later in the session and domestic data including January credit lending later this week.

A Reuters poll showed that China's new yuan loans likely surged in January compared to December but was below the record level hit a year earlier, as credit demand remained subdued.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -9.20 pips vs. offshore -9.20

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

LEVELS AT 0313 GMT:

($1 = 7.3085 Chinese yuan renminbi)