SHANGHAI: China's yuan slipped on Thursday to hover near a three-week low, as the dollar firmed following hawkish Federal Reserve minutes, while tensions around Taiwan also kept investors nervous.   

Prior to the market open, the People's Bank of China (PBoC) set the midpoint rate, around which the yuan is allowed to trade in a 2 per cent band, at 7.1098 per U.S. dollar, the weakest level since Jan. 23.   

"The weaker CNY fix could be interpreted as more PBoC tolerance to allow the currency to weaken in line with regional peers," UBS analysts said in a note.   

"The challenge for the PBoC is to find the balance between a currency level that is conducive to growth, without driving capital outflows."   

In the spot market, the yuan opened at 7.2400 per dollar and was changing hands at 7.2433 at midday, 17 pips weaker from the previous late session close.   

The dollar hovered near a one-week high against its major peers following its best day this month after minutes of the last Federal Reserve meeting revealed a willingness to raise interest rates among some officials.   

"With USD strength likely to last a tad longer, the PBoC could be allowing a tad more headroom for USDCNY to rise," Maybank said in a note, adding that the offshore yuan was likely to trade between 7.20 and 7.26 against the dollar.   

Also denting sentiment, China's military started two days of "punishment" drills held in five areas around Taiwan in what it said was a response to "separatist acts."     

Taiwan's military mobilised its forces and said it was confident it could protect the island.   

The global dollar index fell to 104.87 from the previous close of 104.933. The offshore yuan was trading at 7.2542 per dollar.

 - Reuters