SHANGHAI (Reuters) - China's yuan eased against the U.S. dollar on Wednesday after the central bank set the daily midpoint at its strongest level in 20 months, prompting a rush of dollar buying by corporates.
Prior to market opening on Wednesday, the People's Bank of China (PBOC) set its official yuan midpoint <CNY=PBOC> at 6.4920 per dollar, breaching the key threshold 6.5 per dollar level.
Wednesday's official midpoint was 159 pips, or 0.24 percent, firmer than Tuesday's fix of 6.5079 and was the strongest since May 3, 2016.
In the spot market, the onshore yuan <CNY=CFXS> opened at 6.4988 per dollar and was changing hands at 6.5057 at midday, 108 pips weaker than the previous late session close and 0.21 percent softer than the midpoint.
Traders said corporate demand for the greenback emerged after the spot yuan rate strengthened to below 6.5 per dollar.
A Shanghai-based trader at a foreign bank said overall market sentiment remained cautious as the market had no strong expectations for the yuan's trend.
State-run Securities Times warned against "over-inflated" expectations for the yuan in a front-page commentary on Wednesday.
"Currently, the yuan exchange rate is strengthening to approach a high it reached in September ... Should the yuan continue to rise? Obviously, it requires the central bank to release some signal to stabilise (the Chinese currency)," the newspaper said, reinforcing that the 6.5 per dollar level remained "a key threshold".
The newspaper also said a continued rise in the yuan would hurt exports and stimulate speculation in the foreign exchange market.
Multiple traders said they did not expect any policy to be taken out to stabilise the yuan any time soon as the market was already very stable.
The Thomson Reuters/HKEX Global CNH index <.RXYH>, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.76, weaker than the previous day's 95.93.
The global dollar index <.DXY> rose to 91.917 from the previous close of 91.872.
The offshore yuan was trading 0.01 percent firmer than the onshore spot at 6.505 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs)<CNY1YNDFOR=>, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.6395, 2.22 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
(Reporting by Winni Zhou and John Ruwitch; editing by Simon Cameron-Moore)