Yuan gains ground, outflow fears ease as dollar weakness drags on

SHANGHAI: The Chinese yuan firmed slightly on Wednesday as the dollar index traded near three-week lows, dragged down a surge in the pound after Britain's surprise decision to call a snap election.

A report in Hong Kong's South China Morning Post that Beijing had recently relaxed one of its capital control measures also suggested that regulators were growing confident and the yuan was facing less depreciation pressure.

Reuters was unable to immediately verify the report and China's forex regulator could not be immediately reached for comment.

The People's Bank of China set the midpoint at 6.8664 per dollar, firmer than the previous fix of 6.8849 and the second strongest mid-point since late February.

In the spot market, the yuan opened at 6.8770 per dollar before slipping to 6.8844 at midday, 6 pips away from the previous late session close and about a quarter of a percent away from the midpoint.

A trader at a Chinese bank in Shanghai pointed out that the yuan had actually weakened recently against a basket of currencies.

"It either means higher demand for the U.S dollar, or less intervention by the central bank," the trader said.

On Wednesday, the South China Morning Post cited unidentified sources as saying the government had scrapped a rule requiring commercial banks to stop processing cross-border yuan payments unless they could show that outbound and inbound flows matched each month.

"If it's true, it means regulators are facing much less capital outflow pressure, and are getting more confident," the trader said.

Premier Li Keqiang said on Tuesday that market confidence in the yuan has significantly improved, Xinhua news agency reported.

Global forex markets were focused on sterling, which soared to more than six-month highs after Prime Minister Theresa May called for an early general election, hoping to win more seats and negotiating clout heading into Brexit negotiations.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.06, weaker than the previous day's 94.21.

The global dollar index rose to 99.611 from the previous close of 99.499.

The offshore yuan was trading 0.02 percent away from the onshore spot at 6.883 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.068, -2.85 percent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.