Market News

SHANGHAI, Feb 26 (Reuters) - China's yuan hit one-month lows against a firmer U.S. dollar on Friday, after rallying for eight consecutive months, as fresh concerns about a potential escalation in Sino-U.S. tensions weighed on the local currency.

The dollar held onto gains after rebounding overnight from  three-year lows. The greenback was buoyed by a spike in U.S. bond yields, as growing economic optimism and inflation concerns weighed on debt prices.

The weakness in the yuan also came after Katherine Tai, U.S. President Joe Biden's top trade nominee, backed tariffs as a "legitimate tool" to counter China's state-driven economic model and vowed to hold Beijing to its prior commitments.

A firmer greenback dragged the official guidance on the yuan to its lowest in over three weeks. Prior to the market open, the People's Bank of China (PBOC) set the midpoint rate at 6.4713 per dollar, the weakest level since Feb. 2, and 191 pips or 0.3% softer than the previous fix of 6.4522. 

In the spot market, onshore yuan opened at 6.4760 per dollar and fell to a low of 6.4890, the weakest level since Jan. 28. It pared some losses and traded at 6.4692 at midday, 135 pips weaker than the previous late session close, and on track for its first monthly loss since May.

The yuan has gained more than 10% since last May and continued strength has prompted the authorities to roll out some measures to allow more capital outflows as a too strong currency could hurt the country's exports.

A trader at a foreign bank said investors were closely following moves in the U.S. Treasury yields, which could heavily affect the dollar and other major currencies.

Market attention will turn to China's annual gathering of parliament next week, when China will announce goals for 2021 as well as its next five-year plan for economic development.

"A clear action plan on the top priorities would be more important for the market to evaluate the impact on industries and the whole economy," said Iris Pang, Greater China economist at ING.

"The worst-case scenario would be a lack of clear direction on how to achieve the objectives ... which would create market uncertainty and doubt."

The offshore yuan, which eased to a one-month low of 6.5080, traded at 6.48 by midday.