Over the recent years, U.S. President Donald Trump has repeatedly criticised Beijing's managed currency regime, saying it is manipulating the yuan to gain a trade advantage. So market participants believe China will want to avoid giving the U.S. any excuse to further drag out the trade dispute.
U.S. Treasury Steven Mnuchin said on Thursday that currency issues would be on the agenda for the bilateral trade talks next week, when Chinese Vice Premier Liu He is scheduled to visit Washington on Jan.30-31 for the latest round of negotiations.
"Currency has always been part of the discussions, it's on a list, it's one of the important issues, we've talked about it all the time, so it'll continue to be on it," Mnuchin said but declined comment when asked about the yuan's recent strength.
Dealers said a stronger yuan would create a better atmosphere for the trade talks.
"The spot yuan has been heavily affected by the developments in the trade negotiations, and such news will continue to be the key driver for the yuan in the near term," said a trader at a foreign bank.
Prior to the market opening on Friday, the People's Bank of China (PBOC) set the midpoint rate at 6.7941 per dollar, 139 pips or 0.2 percent weaker than the previous fix of 6.7802.
In the spot market, the onshore spot yuan opened at 6.7903 per dollar and jumped to a high of 6.7688 before changing hands at 6.7750 at midday, 125 pips stronger than the previous late session close and 0.28 percent firmer than the midpoint.
If the onshore yuan finishes the late night session at the midday level, it would have gained 0.06 percent for the week, compared with a loss of 0.2 percent a week earlier. And this week will also marks the fifth weekly gain over the past six weeks.
Dealers said the yuan was also helped by a slight pullback in the dollar against its key rivals.
The dollar index, a gauge that measures the strength of unit against six other major currencies, fell to 96.391 at midday from the previous close of 96.601.
Separately, a latest Reuters poll showed that investors turned bullish on the yuan for the first time in nearly eight months, after Sino-U.S. trade tensions took a turn for the worse last year and consumed global markets for much of 2018.
There are some who expect the yuan to turn its fortunes around from 2018, when it lost 5.3 percent of its value against the dollar.
Ji Tianhe, China rates and FX strategist at BNP Paribas in Beijing, retained his view that the yuan could rise to 6.7 per dollar, a forecast he first made in October.
"If yuan depreciation pressure is faded and the yuan resumes appreciation, that gives authorities more leeway in monetary policy ... without being much worried about the influence on the exchange rate," Ji said.
"Interest rates might not fall as much as market expects, if China's macro conditions turn to be not as bad as now perceived."
Earlier this week, official data showed that the world's second largest economy expanded at its slowest pace in 28 years in 2018.
The offshore yuan was trading at 6.78 per dollar as of midday.
(Reporting by Winni Zhou and John Ruwitch; Editing by Shri Navaratnam)
