Yuan eases as China sets weakest fix in two months

• Dollar decline helps relieve yuan depreciation pressure
• PBOC keen to prevent sharp gains in yuan
• Market monitoring Sino-US trade developments

SHANGHAI, March 20 (Reuters) - The yuan eased against the U.S. dollar on Thursday after China sets its official midpoint rate at the weakest in two months, signalling authorities are keen to prevent quick or sharp gains in the currency against a declining greenback.

Prior to the market opening, the People's Bank of China set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1754 per dollar, its weakest level since U.S. President Donald Trump's inauguration on January 20.

The U.S. dollar =USD has been on the backfoot for weeks hobbled by Trump's erratic tariff policies and soft economic data.

That has helped the yuan pare losses sustained since his election in November and provided the PBOC with some reprieve from using the fixing to contain losses.

The dollar index .DXY has dropped about 4% this month, but the yuan has appreciated less than 1% against the dollar.

The weaker fixing did not mean the PBOC has deviated from its policy stance of preserving currency stability, especially as Trump's review of trade partners' currency policies in early April is coming up, said Ken Cheung, director of currency strategy at Mizuho Securities.

"The US dollar decline and Fed's easing bias should provide relief to the renminbi (yuan) market, giving the PBOC some flexibility to dial back some yuan fixing support," he said.

The spot yuan CNY=CFXS opened at 7.2250 per dollar and was last trading at 7.2363 as of 0402 GMT, 83 pips lower than the previous late session close and 0.85% weaker than the midpoint.

The dollar was steady on Thursday, hovering near a five-month low, after the Federal Reserve kept its benchmark overnight rate steady on Wednesday and indicated it was not in a rush to cut rates even as uncertainty around U.S. tariffs weighed.

Meanwhile, China held benchmark lending rates steady for the fifth straight month in March, matching market expectations.

Traders said the recent movements in the yuan suggested it is unlikely to strengthen beyond 7.22 per dollar without further market news, particularly regarding developments in trade negotiations between the world's two largest economies.

Global investment banks have raised their projections for China's economic growth and eased bearish views on the yuan, spurred by early signs of economic recovery, though concerns over escalating trade disputes with the U.S. persist.

The offshore yuan traded at 7.2391 yuan per dollar CNH=, down about 0.12% in Asian trade.

The dollar index =USD, which measures the greenback against six currencies, stood flat at 103.38.

LEVELS AT 0402 GMT