The dollar index, which measures the dollar's strength against six other major currencies, fell on Monday by the most in six weeks after U.S. President Donald Trump announced tariffs on metal imports from Brazil and Argentina.

The weakness in the greenback pushed the official yuan midpoint fixing higher on Tuesday. Prior to the market open, the People's Bank of China (PBOC) set the midpoint rate at 7.0223 per dollar, 39 pips firmer than the previous fix of 7.0262. It was the strongest fix since Nov. 21.

In the spot market, onshore yuan opened at 7.0420 per dollar and was changing hands at 7.0397 at midday, 12 pips firmer than the previous late session close.

Traders said the decline in the dollar lent support to the yuan, but local market sentiment remained weak as the renewed tariffs on Brazil and Argentina goods could cloud a Sino-U.S. trade deal.

"This sent out the message that Trump the tariff man is unlikely to drop the tariff as a key weapon to renegotiate the trade deal and retaliate against other trading partners," Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said in a note.

It also suggested that the hurdle to roll back existing tariffs was very high, he added.

"Domestic (Chinese) investors believe that it could be hard for the two nations to sign a trade deal by Dec. 15," said a senior trader at a foreign bank, referring to the deadline for Washington to impose new tariffs on Chinese products.

Still, several traders said the market widely expected that no more tariffs would be implemented in mid-December and they would likely be postponed instead.

The Sino-U.S. trade row has been the key factor influencing the yuan's movement and market sentiment since it began last year.

A chief dealer at a Chinese bank said the market would continue to wait and gauge the progress in the bilateral talks.

Yuan was dragged lower late Monday after China took retaliatory measures following U.S. legislation that supported protests in Hong Kong, analysts at China Construction Bank (Asia) said.

China on Monday banned U.S. military ships and aircraft from visiting Hong Kong and slapped sanctions on several U.S. non-government organizations for allegedly encouraging anti-government protesters in the city to commit violent acts.

The offshore yuan was trading at 7.0398 per dollar.

The yuan market at 0400 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 7.0223 7.0262 0.06%

Spot yuan 7.0397 7.0409 0.02%

Divergence from 0.25%

midpoint*

Spot change YTD -2.37%

Spot change since 2005 17.57%

revaluation

Key indexes:

Item Current Previous Change

Thomson 92.11 92.28 -0.2

Reuters/HKEX

CNH index

Dollar index 97.907 97.856 0.1

*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 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 7.0398 0.00%

*

Offshore 7.1102 -1.24%

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 Winni Zhou and John Ruwitch; editing by Richard Pullin)