China's yuan firms slightly, supported by rise in stocks

SHANGHAI (Reuters) - China's yuan edged up against the dollar by midday on Thursday as a recovery in the country's major stock indexes boosted sentiment on the currency in spite of a weaker midpoint.

The benchmark Shanghai Composite Index was up 1.55 percent by midday partly as a strong rebound on Wall Street helped calm global markets after days of wild volatility. [.SS]

"More money flows into the currency market after a slew of easing policies have also boosted sentiment in the stock market," said a trader at a foreign bank in Shanghai.

"But the recovery on the yuan may be just a flash." he said. "Many companies and big investors are worried about the prospect of the currency's depreciation."

Traders said they believed the yuan was facing downward pressure after the central bank cut interest rates to boost the sluggish economy earlier this week.

However, Beijing appears to have been so surprised by the global reaction to its abrupt currency devaluation in mid-August that it is likely to keep the yuan on a tight leash in the near-term to head off a currency war that could spark a broader financial crisis, policy insiders say.

The People's Bank of China set the midpoint rate at 6.4085 per dollar prior to market open, 0.07 percent weaker than the previous fix 6.4043 and at its weakest level since 2011 for the second straight day.

The spot market opened at 6.4155 per dollar and was changing hands at 6.4080 at midday, 0.04 percent stronger than the previous close.

In a related development, a U.S. official hinted that the Federal Reserve was reconsidering whether to go-ahead with an interest rate increase next month.

Offshore yuan was trading 1.08 percent weaker than the onshore spot at 6.4778 per dollar.

Offshore one-year non-deliverable forwards contracts, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.6675, or 3.88 percent weaker than Thursday's midpoint.

(Reporting by the Shanghai Newsroom; Editing by Jacqueline Wong)