China's yuan inched higher against an easing dollar on Wednesday, as less hawkish than expected comments from Federal Reserve Chair Jerome Powell lent support. The greenback eased after Powell acknowledged that interest rates might need to move higher than expected if economic conditions remained strong, but reiterated that he felt a process of disinflation was underway.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.7752 per dollar, 215 pips or 0.32% firmer than the previous fix of 6.7967. In the spot market, the onshore yuan opened at 6.7777 per dollar and was changing hands at 6.7791 at midday, 79 pips firmer than the previous late session close.

Currency traders said the yuan's gains were capped as investors remained cautious while awaiting more clues including upcoming U.S. inflation data to figure out the tightening trajectory in the world's largest economy, which could affect the yuan and other major currencies. Some market participants and analysts were rather optimistic about the yuan's performance in mid- to long-term as they believe China's economy should benefit from a strong service sector rebound.

"Lunar New Year holiday data, January PMI, and daily travel, transportation and recreation indicators point to a quicker-than-expected revival of services activity at the start of the year," economists at Barclays said in a note.

Such optimism also prompted banks to revise up their forecasts for the Chinese currency. "We are positive about Asia FX and expect the strength in CNH to continue as China's consumption-led recovery drives momentum in Asian FX in 2023," analysts at ANZ said in a note, revising their year-end forecast for the yuan to 6.55 per dollar from 6.65 previously. By midday, the global dollar index fell to 103.321 from the previous close of 103.427, while the offshore yuan was trading at 6.7858 per dollar.

The one-year forward value for the offshore yuan traded at 6.6304 per dollar, indicating a roughly 2.34% appreciation within 12 months. The yuan market at 0335 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.7752 6.7967 0.32% Spot yuan 6.7791 6.787 0.12% Divergence from 0.06% midpoint* Spot change YTD 1.78% Spot change since 2005 22.09% revaluation Key indexes: Item Current Previous Change Dollar index 103.321 103.427 -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% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.7858 -0.10% * Offshore ∞% 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 Brenda Goh; Editing by Kim Coghill)