SHANGHAI, Sept 7 (Reuters) - The yuan hovered at a 10-month low against a strong dollar on Thursday, despite a stronger-than-expected official fixing and as weak trade data pointed to growing economic headwinds.
The yuan was already languishing amid a resilient dollar ahead of China's trade figures, which showed exports and imports contracting at a slower pace and slightly beating expectations. Exports in August fell 8.8% from a year earlier, while imports contracted 7.3%, customs data showed, maintaining pressure on the country's vast manufacturing sector.

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 7.1986 per dollar, 17 pips weaker than the previous fix of 7.1969. In the spot market, the onshore yuan opened at 7.3202 per dollar and was changing hands at 7.3236 at midday, 52 pips softer than the previous late session close.

And it was not far from a 10-month low of 7.3248 hit a day earlier. "Recent yuan weakness was largely due to a strong dollar," said Ming Ming, chief economist at Citic Securities. "In addition to the elevated dollar index, there are two factors - loosening domestic monetary policy and a slowdown in economic recovery in the second and third quarter." Thursday's fixing, which was set at a fresh two-week low, was again much stronger than market projections, a situation that has persisted for months and seen by investors as a sign that authorities are uncomfortable with the yuan's weakness.

The midpoint was 1,135 pips firmer than Reuters' estimate of 7.3121. The official guidance rate also capped the yuan's daily downside limit at 7.3426 per dollar, with several currency traders speculating that the 7.35 level could be the downside edge of the range authorities are comfortable with.
"We think yuan depreciation is not aligned with policy intentions, given its limited support for growth and second order impact on Asian currencies, risking competitive depreciation dynamics and an acceleration of capital outflows from the region," Chang Wei Liang, FX & credit strategist at DBS, said in a note.

"Policymakers could thus continue to lean against RMB depreciation pressure." China remains an outlier among global central banks as it has loosened monetary policy to shore up a stalling recovery whereas others have raised interest rates to combat inflation. The widening yield differentials with major economies, particularly the United States, has pressured the yuan and raised the risk of capital outflows.

"With such a wide interest rate gap and low volatility in the yuan, carry trade has been profitable," a trader at a foreign bank said. By midday, the global dollar index stood at 104.86, while the offshore yuan was trading at 7.328 per dollar. The yuan market at 0253 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.1986 7.1969 -0.02% Spot yuan 7.3236 7.3184 -0.07% Divergence from 1.74% midpoint* Spot change YTD -5.78% Spot change since 2005 13.01% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 104.86 104.861 0.0 *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 7.328 -0.06% * Offshore 7.1237 1.05% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, kraken since non-deliverable forwards are settled against the midpoint.

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