China's yuan firmed against a weakening U.S. dollar on Thursday, as the dollar index fell in late session on Wednesday to the lowest level in five months. The dollar index broke lower in the late session on Wednesday as 10-year U.S. treasury fell below 3.8%, for the first time in five months.

"There is no point fighting the dollar downside momentum at this point given the low market volumes," said Alvin Tan, head of Asia FX strategy at RBC Captial Markets. For the yuan to strengthen, there needs to be more evidence of economic recovery, foreign inflows, and broad U.S. dollar weakness, UBS analysts said in a note. Prior to the market opening, the People's Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.0974 per U.S. dollar, 28 pips firmer down than the previous fix 7.1002. The spot yuan opened at 7.1320 per dollar and was changing hands at 7.1192 at midday, 248 pips firmer than the previous late session close and 0.31% away from the midpoint. The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.

The global dollar index fell to 100.814, the lowest since the end of July, from the previous close of 100.986. The offshore yuan was trading 39 pips weaker than the onshore spot at 7.123 per dollar. The yuan market at 0317 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.0974 7.1002 0.04% Spot yuan 7.1192 7.144 0.35% Divergence from 0.31% midpoint* Spot change YTD -3.08% Spot change since 2005 16.26% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 100.814 100.986 -0.2 *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 7.123 -0.05% * Offshore 6.942 2.24% 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 Shanghai Newsroom; Editing by Michael Perry)