HONG KONG, Sept 1 (Reuters) - The yuan jumped to its strongest level in over a year on Tuesday, riding on improving domestic data and a widening interest rate gap favouring the Chinese currency. The onshore yuan reached the strongest level since May at 6.8181 per dollar while the offshore yuan hit a July 2019 high at 6.8178. Both are up 0.4% on the day and stood 5% stronger than their year-to-date trough in June. The currency has been rallying in recent weeks, largely as China's economy has continued to build momentum after the coronavirus-induced slump while the U.S. dollar has been under pressure. Chinese factory activity expanded at the fastest clip in nearly a decade in August as manufacturers ramped up production to meet rebounding demand, according to a private survey. The dollar lost 0.4% in Asia morning trade, and a widening gap between Chinese interest rates over those of the United States underpinned the yuan, said traders in Shanghai. The Federal Reserve has cut its policy rate to zero lower-bound while the People's Bank of China has been much less aggressive in its loosening. Chinese 10-year government bonds yielded over 3%, while their U.S. equivalent traded at around 0.7% on Tuesday, according to Refinitiv data. The recent pledge by China and the United States to stick to their Phase 1 trade agreement also proved supportive for the yuan, despite the strained ties between the world's two biggest economies over a broad range of issues. "While there is no specific trigger, momentum has attracted a lot of investors to chase the yuan rally and dollar decline," said Ken Cheung, chief Asia FX strategist at Mizuho. Yuan shorts were squeezed as those betting on strength piled in orders on Tuesday, said one of the traders. However, political risks remain in play ahead of the November U.S. presidential election, said Christy Tan, head of markets strategy, Asia, at National Australia Bank. "Nothing much has changed fundamentally," she said. The PBOC appears comfortable with the appreciation, setting the midpoint guidance rate at 6.8498, the strongest since last June and near the Reuters estimate. As Chinese exports are stating to firm up, there is less of a reason for Beijing to tame the yuan right now, Cheung said. The yuan market at 0410 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8498 6.8605 0.16% Spot yuan 6.8205 6.8483 0.41% Divergence from -0.43% midpoint* Spot change YTD 2.09% Spot change since 2005 21.35% revaluation Key indexes: Item Current Previous Change Thomson 92.89 92.72 0.2 Reuters/HKEX CNH index Dollar index 91.807 92.183 -0.4 *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 Instrument Current Difference from onshore Offshore spot yuan 6.82 0.01% * Offshore 6.982 -1.89% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Noah Sin in Hong Kong; Additional reporting by Winni Zhou in Shanghai and Xiao Han in Beijing)
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