China's yuan holds ground ahead of Fed outcome

SHANGHAI, Sept 16 (Reuters) - China's yuan steadied against the dollar on Wednesday despite a much-strengthened official guidance rate set by the central bank, as investors stayed on the sidelines ahead of the Federal Reserve's policy outcome due later in the day.

The dollar clung to recent gains and traded near multi-week highs against a handful of major peers ahead of the Fed decision, with traders expecting the first of what could be several U.S. interest rate hikes.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.7628 per dollar, its strongest since February 3, 2023, and 480 pips weaker than a Reuters estimate of 6.7148. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

"Recent fixings suggest that the pushback remains mild for yuan appreciation and as such, leaving the USD/CNH in a flat-line," Maybank analysts said in a note.

"This came as activity data suggests that domestic demand continues to falter at home."

In the spot market, the onshore yuan was unchanged at 6.7112 per dollar as of 0254 GMT, while its offshore counterpart was up about 0.03% in Asian trade at 6.7116.

Official data released a day earlier showed that China's industrial sector demonstrated renewed strength in August as the AI-driven tech boom fuelled factory output, though sluggish consumption and a worsening investment slump reinforced concerns over deepening economic imbalances.

"A look at the CNY's performance against the U.S. dollar shows that the CNY's appreciation has recently lost significant momentum," said Volkmar Baur, FX strategist at Commerzbank.

"We believe that weakness in the domestic economy is a factor here. And since this weakness is likely to persist, we expect only a slow further appreciation of the CNY against the U.S. dollar for the remainder of the year."

China's yuan has gained 4.2% against the dollar so far this year to become one of the best-performing Asian currencies.

Meanwhile, China's foreign exchange regulator has instructed banks to encourage more corporate clients to hedge currency risks, sources told Reuters, stepping up efforts to shield exporters from the yuan's steady appreciation.

LEVELS AT 0254 GMT: