SHANGHAI: China’s yuan hovered around a three-year peak against the dollar on Friday, after breaching a key threshold in the offshore market a day earlier, as signs of renewed hostilities in the Middle East kept gains in check.

The offshore yuan strengthened past the psychologically important 6.8-per-dollar level on Thursday on hopes of a US-Iran deal to end the war, before market sentiment soured as renewed fighting broke out.

The yuan will continue to track US dollar movements and oil prices in the short term, said Marco Sun, chief financial market analyst at MUFG (China).

“If oil prices reinforce expectations of reflation in the US and delay the Federal Reserve’s interest rate cuts, the dollar’s interest rate advantage and the dollar index may strengthen again, putting pressure on the yuan to depreciate passively,” Sun said.

The onshore yuan traded at 6.8044 per dollar as of 0254 GMT, not far from a more than three-year high of 6.8005 hit on Thursday.

If it finishes the late night session at the current level, it would have gained 0.4% to the dollar for the week.

Its offshore counterpart traded at 6.8042 yuan per dollar, up about 0.08% in Asian trade. It hit an over three-year peak of 6.7959 a day earlier.

Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.8502 per dollar, 364 pips weaker than a Reuters’ estimate of 6.8138. The spot yuan is allowed to trade a maximum of 2% either side of the fixed midpoint each day.

The central bank has persistently set softer-than-expected fixings since last November to maintain currency stability, traders said, adding that major state-owned banks were seen

 buying dollars and selling yuan in the onshore market on Thursday to defend the key 6.8 level after it was breached offshore.

“We remain positive on the offshore yuan, supported by sustained equity inflows and improving macro conditions,” said Wee Khoon Chong, APAC macro strategist at BNY.

“The counter-cyclical factor (CCF) is unlikely to disrupt the gradual appreciation trend, with USD/CNH having a good chance to retest its 2023 low of 6.7139.”

Separately, market attention will shift to US President Donald Trump’s visit to China next week and a string of domestic data including trade on Saturday, inflation on Monday and credit lending data later next week.