China's banking and insurance regulator said over the weekend that it did not expect a persistent decline in the yuan and warned speculative short sellers they would suffer "heavy losses" if they bet against the currency.
Previously, multiple senior officials at the central bank reiterated that China would keep the yuan "basically stable" and draw on a toolbox of policies to manage fluctuations. The yuan has lost more than 2.3% versus the dollar since U.S.-China tensions escalated earlier this month.
"Ongoing USD weakness, coupled with regular jawboning from officials benefitted EM/Asian FX, depressing the USD-CNH towards the 6.9100 zone," FX strategists at OCBC Bank in Singapore said in a note.
Prior to market opening on Monday, the People's Bank of China set the midpoint rate at 6.8924 per dollar, 69 pips or 0.1% firmer than the previous fix of 6.8993.
In the spot market, onshore yuan opened at 6.8888 per dollar and rose to a high of 6.8854 at one point, the strongest since May 16.
At midday, the onshore spot yuan was changing hands at 6.8930, 75 pips stronger than the previous late session close but 0.01 percent softer than the midpoint. The yuan closed firmer at 6.9005 on Friday.
The fixing was again firmer than market expectations, traders said. The midpoint setting has persistently come in stronger than market consensus, suggesting the central bank is unwilling to see sharp and rapid losses in the Chinese currency.
The stronger-than-expected fixing bolstered spot yuan in morning trade.
A trader at a Chinese bank said the renminbi was likely to continue hovering around 6.9 per dollar in the near term as some seasonal dollar demand would kick in soon to cap gains in the yuan, while the outcome of Sino-U.S. trade negotiations remained uncertain.
Chinese companies listed offshore usually start making foreign exchange purchases for dividend payments starting in June, and such demand is likely to pile pressure on the yuan.
Unlike previous episodes of yuan weakness, the PBOC has only set firmer-than-expected official midpoints and made rounds of verbal comments to guard its currency this time.
As the yuan slips to historically weak levels against the dollar, the central bank's atypical light touch is spurring speculation that policymakers want to be more judicious in their intervention and have no specific target for the currency.
Separately, a survey on China's manufacturing activity due later this week will be closely watched for clues on the health of the world's second-largest economy.
"The manufacturing PMI for May will be of interest. The survey will be the first data release to reflect the negative impact of re-escalating China-U.S. trade tensions on sentiment," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
"Disappointment could spark fears of global recession driven by the trade war and fuel PBOC's easing bias."
As of midday, the global dollar index fell to 97.556 from the previous close of 97.613.
The offshore yuan was trading at 6.9088 per dollar at midday.
(Reporting by Winni Zhou and John Ruwitch; Editing by Jacqueline Wong)