China's yuan hits 2-1/2-month low as Sino-US trade tensions raise growth fears

SHANGHAI, April 7 (Reuters) - China's yuan slipped to a 2-1/2-month low against the dollar on Monday, dragged down by intensifying trade tensions between the world's two largest economies following tit-for-tat tariffs on each other's goods.

The pace of declines in the yuan was somewhat tempered by the central bank's support, which continued to set the daily official midpoint at a level firmer than market projections.

The onshore yuan fell to a trough of 7.3165 per dollar in early trade, the weakest level since January 20, before changing hands at 7.3150 as of 0214 GMT.

Its offshore counterpart was fetching 7.3255 per dollar, down about 0.41% in Asian trade.

China, which is now facing U.S. tariffs of over 50%, responded on Friday by slapping extra levies on U.S. imports, and global markets are closely watching for any moves by Beijing to allow its currency to weaken.

During Donald Trump's first term as president, the yuan weakened more than 12% against the dollar in the wake of a series of tit-for-tat tariff announcements between March 2018 and May 2020.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1980 per dollar, the weakest level since December 3, 2024 and 1,182 pips firmer than a Reuters' estimate of 7.3162.

The central bank has set its official guidance on the firmer side of market projections since mid-November, which analysts and traders see as a sign of unease over the yuan's decline.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said Monday's official midpoint fixing suggested that the authorities will not engineer a sharp currency devaluation to offset tariff hikes.

"The central bank's current strategy looks like it wants to continue to allow the yuan to depreciate against the basket, while keeping it stable against the dollar," Cheung said.

Based on Monday's official fixing, the yuan's value against its trading partners fell to 98.46, the lowest level since March 19, according to Reuters calculations based on official data.

Some analysts say China's economy could suffer a sharp blow in the absence of any notable officially-driven depreciation of the yuan against the U.S. currency.

"If the PBOC allows it to weaken significantly (our year-end forecast is 8.00/$), then the hit to China's GDP from U.S. tariffs as they currently stand could be kept to around 0.5%," analysts at Capital Economics said.

"But in the absence of any exchange rate adjustment, the damage could climb to around 1.0% of GDP, relative to the pre-election baseline." (Reporting by Shanghai Newsroom Editing by Shri Navaratnam)