China's yuan firms as dollar dips ahead of Powell testimony

China's yuan firmed on Tuesday after the central bank set stronger guidance for the currency's trading band and as the dollar lurked near six-week lows ahead of Federal Reserve chief Jerome Powell's testimony to the U.S. Congress.

The yuan has kept to a narrow range since surging 1% against the U.S. dollar on the first trading day of the year, and on Tuesday was trading half a percent off of late-January highs.

"It feels like the yuan is not moving at all in the near term, there are few long or short opportunities," said a trader at a foreign bank, adding that some downward pressure on the yuan is possible in the second quarter.

Before the market open, the People's Bank of China (PBOC) set the yuan's daily midpoint at 6.4516 per dollar, firmer than the previous 6.4563. Spot yuan opened at 6.4581 per dollar and was changing hands at 6.4584 around midday, 62 pips stronger than Monday's late session close.

The offshore yuan traded almost at par with its onshore counterpart, strengthening to 6.4583 per dollar from a previous close of 6.4670. Gains in the offshore and onshore yuan came as the global dollar index fell to 90.015 from the previous close of 90.041, near a six-week low.

Investors expect Fed chief Powell, who gives his testimony before Congress at 1500 GMT, to reassure the central bank will tolerate higher inflation without immediately raising rates, which could calm bond markets and weigh on the dollar.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, weakened to 96.04 from the previous day's 96.15.

While the yuan has moved little in recent weeks, Ming Ming, an analyst at CITIC Securities, said its persistent strength against the dollar will "inevitably" constrain domestic monetary policy. "If the exchange rate remains strong...this will continue to suppress exports and increase upward pressure on domestic asset prices.

In view of the consideration to maintain equilibrium, the PBOC will be restricted in monetary tightening, so domestic monetary conditions will also be relatively loose," he said in a note. Offshore one-year non-deliverable forwards contracts (NDFs), watched as an indicator of market expectations of the yuan's value, traded at 6.631 on Tuesday.