SHANGHAI (Reuters) - China's yuan inched up against the U.S. dollar in early trade on Friday, as investors reduced long-dollar positions and refrained from testing lows in the Chinese currency following a stronger-than-expected official midpoint setting.
However, traders said market sentiment was hurt by renewed pressure from trade tensions between Beijing and Washington, and they were afraid sharp losses in the local unit could again force the authorities to roll out more stabilizing measures.
Bloomberg News reported on Thursday that Trump is prepared to quickly ramp up a trade war with China and has told aides he is ready to impose tariffs on $200 billion more in Chinese imports as soon as the public comment period on the plan ends next week.
"This doesn't make it easier for the market to digest and I'd expect this to dampen sentiment across the APAC region today," Kerry Craig, global market strategist at J.P. Morgan Asset Management said in a note.
The stronger U.S. dollar "is the biggest near term challenge for Asian markets," he said.
Prior to market opening on Friday, the People's Bank of China weakened its official yuan midpoint
Friday's fixing, the weakest since Monday, was also the biggest one-day weakening in percentage terms since Aug. 24. But it was 80 pips firmer than Reuters' estimate of 6.8326 per dollar.
In the spot market, onshore yuan
Its offshore counterpart
Some traders said the Friday's fixing was much stronger than their models had suggested, even after they took a "counter-cyclical" factor into consideration. They interpreted it as a sign that authorities were unwilling to see further weakness in the yuan after a record 10 straight weeks of losses.
On Aug. 24, China's central bank said it was adjusting its methodology for fixing the daily midpoint to keep the currency market stable.
Market participants largely took the X-factor as a tool to reduce price swings and counteract depreciation pressure on the yuan.
The Chinese currency has weakened more than 8 percent to the dollar since the end of March and booked a year-to-date loss of nearly 5 percent.
Trump told Bloomberg in an interview on Thursday that the United States was studying currency manipulation "formula" for the yuan.
"It is a formula," Trump said. "And we are looking very strongly at the formula."
In the past, Trump has repeatedly accused China of manipulating the yuan, but the U.S. Treasury has not declared China a currency manipulator since 1994.
Earlier this week, Treasury Secretary Steven Mnuchin praised China for supporting its currency and said "that is not currency manipulation".
In global markets, the dollar firmed against its major trading partners, finding support as the latest round of U.S.-China trade tensions dulled investor risk appetite, with weakness in emerging market currencies also helping lift the greenback.