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China's yuan ends at 28-month low despite fresh policy step, nears daily lower limit

SHANGHAI (Reuters) -China's yuan finished domestic trading session at a new 28-month low against the dollar on Monday, near its downside trading limit, despite the central bank taking steps to rein in the currency's weakness.

The People's Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from zero starting on Sept. 28.

The announcement, along with another firmer-than-expected daily midpoint fixing, was meant to slow the pace of the yuan's depreciation by making it more expensive to bet against it, traders said.

"This could stem further forward positions that have been negative for the yuan and slow its depreciation pace," analysts at Maybank said in a note.

Prior to market opening, the PBOC set the midpoint rate at 7.0298 per dollar, 378 pips or 0.54% weaker than the previous fix of 6.992 on Friday, the weakest since July 7, 2020.

However, the midpoint continued to come in much stronger than market projections for the 23rd straight trading session, traders and analysts said.

The official daily midpoint fixing limits the onshore yuan to trade in a narrow range of 2% above or below, and Monday's guidance kept the range to between 6.8892 and 7.1704.

The onshore yuan ended the domestic session at 7.1464 per dollar, its weakest such close since May 28, 2020 - mirroring broad falls in other currencies amid a sweeping rally by the dollar thanks in part to the U.S. Federal Reserve's rapid tightening of monetary policy.

The onshore yuan hit an intraday low of 7.1690, 14 pips away from the lower end of the trading band.

"The market is almost hitting the limit," said a trader at a foreign bank.

A second trader at a foreign bank said dollar buying was heavy as many corporate clients rushed to take the last chance to secure their forward dollar buying contacts before the risk reserve ratio hike comes into effect on Wednesday.

Still, market participants believe more policy actions will be rolled out should the yuan's weakness persist.

"Given the weak CNY level, it is likely that the PBOC will roll out measures to remove the market's one-side depreciation of CNY against the U.S. dollar in the near term," said Li Lin, head of global markets research for Asia at MUFG Bank.

Li expects further cuts to the amount of foreign exchange banks must hold as reserve, after a reduction earlier this month.

(Reporting by Winni Zhou and Brenda Goh; editing by Jason Neely)

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