SHANGHAI/SINGAPORE, July 4 (Reuters) - China's yuan finished the domestic session at a one-week high against the dollar on Tuesday, as the central bank continued to lend support to prevent the yuan from weakening too fast and too far.
In the spot market, the onshore yuan finished the domestic session at 7.2161 per dollar, the strongest such close since June 27, and 289 pips stronger than the previous late night close of 7.2450.
The yuan bounce came as the People's Bank of China (PBOC) set a stronger-than-expected official midpoint rate on Tuesday, similar to what was seen over the past week, a sign that market participants usually use to gauge the official stance towards the foreign exchange market.
In addition, major state banks lowered their dollar deposit rates for the second time in a month, seven banking sources with direct knowledge of the matter said, as authorities stepped up efforts to arrest a slide in the yuan.
The continued firmer-than-expected midpoint rates suggested that authorities have become increasingly uncomfortable with the rapid losses in the yuan, said a trader at a foreign bank.
The PBOC set the midpoint rate at a near two-week high of 7.2046 per dollar prior to market opening, 111 pips firmer than the previous fix of 7.2157.
Traders and analysts said the midpoint guidance was much stronger than their projections and it was 340 pips firmer than Reuters' estimate of 7.2386.
"While it may take time to prepare the deployment of a massive stimulus package to mitigate under-delivery risk until the Politburo meeting at end-July, imposing a yuan fixing counter-cyclical factor to buy some time maybe a feasible policy option," said Ken Cheung, chief Asian FX strategist at Mizuho Bank, referring to the much strengthened guidance rate.
Widening yield differentials with other major economies, especially the United States, and a slowdown in China's economy, drove the yuan down nearly 5% against the dollar so far this year - one of the worst performing Asian currencies.
Market participants have also been anxiously awaiting policy measures to prop up the economy, traders said.
"We still hold a glass half full view that a stimulus package could be unleashed after the Chinese leaders held multiple rounds of conversations with local and foreign business leaders and foreign counterparties," Maybank analysts said in a note.
"We see these as a way to gather feedback and to come up with a more effective plan to support the economy." (Reporting by Winni Zhou and Tom Westbrook Editing by Peter Graff)
