China's yuan hovers near three-week low after dollar firms

China's yuan softened and hovered around a three-week low against the U.S. dollar on Wednesday, as the country's central bank set the official guidance rate at the weakest level in nearly three months and the greenback held firm.

The dollar has been supported by Federal Reserve officials' cautious remarks this week on the outlook for inflation and interest rates, putting pressure on Asian currencies.

Prior to the market's open, the People's Bank of China set the midpoint rate USDCNY, around which the yuan is allowed to trade in a 2% band, at 7.1077 per U.S. dollar, the weakest level since Feb. 26 though still much firmer than market expectations.

A pullback in China and Hong Kong stocks also contributed to the currency's weakness, analysts say.

Spot yuan USDCNY opened at 7.2389 per dollar and was changing hands at 7.2393 at midday, 16 pips away from the previous late session close and 1.85% away from the midpoint.

The yuan touched a three-week low of 7.2419 on Tuesday.

"The monetary divergence between the Fed and PBoC will continue to weigh on the CNH and CNY," said Ken Cheung, chief Asian FX strategist at Mizuho Bank, adding that the buoyant mood fuelled by China's latest property rescue package has cooled this week.

The global dollar index DXY fell to 104.645 from the previous close of 104.661.

The offshore yuan USDCNH was trading -0.13% away from the onshore spot at 7.2488 per dollar.

The yuan market at 0349 GMT:

ONSHORE SPOT:

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

*Premium for offshore spot over onshore USDCNY

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. USDCNY.