SHANGHAI: China's yuan firmed against the US dollar on Thursday, underpinned by a stronger official midpoint and broad greenback weakness in overseas markets as Treasury yields retreated.

The Chinese currency also looked set to post its steepest annual gain since 2008, reversing three straight years of depreciation.

The dollar was on the defensive on Thursday morning in global markets, facing headwinds from a dip in US 10-year bond yields.

The global dollar index, a gauge that measures the dollar strength against six other major currencies, stood at 92.922 as of midday, near a low of 92.956 hit on Wednesday, which was the weakest since Dec. 1.

Prior to market opening on Thursday, the People's Bank of China (PBOC) lifted its official yuan midpoint to a fresh 3-1/2-month high at 6.5412 per dollar.

Thursday's official midpoint, 9 pips firmer than the previous fix of 6.5421 on Wednesday, was the strongest since Sept. 13.

In the spot market, the onshore yuan opened at 6.5560 per dollar and was changing hands at 6.5440 at midday, 130 pips firmer than the previous late session close but 0.04 percent weaker than the midpoint.

Traders said the weak dollar has supported the yuan not only on Thursday, but also through the most of 2017. The cheaper dollar has allowed investors to bargain hunt for the greenback, pulling the spot yuan rate lower than the same day's midpoint.

Several traders said they expected the yuan to swing in a relatively wide range of 6.5 to 6.6 per dollar in the last two trading days of this year, as some tiny transactions could amplify fluctuation in such tight trading.

Recent moves in the yuan have pushed its year-to-date gain to around 6.2 percent against the dollar, recovering from a loss of about 6.5 percent a year earlier, the worst annual performance since 1994.

Separately, tighter cash conditions in China's money market are also expected to have supported the yuan.

China's central bank has held back from injecting cash into the money market for five straight trading days, pushing a key money market rate to its highest level in four years as financial institutions look for funds through the year-end.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.72, weaker than the previous day's 95.79.

The offshore yuan was trading 0.01 percent weaker than the onshore spot at 6.5445 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 6.6905, -2.23 percent away from the midpoint.

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