SHANGHAI, May 23 (Reuters) - 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% 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. 
    The yuan market at 3:39AM GMT: 
 Item               Current  Previous  Change
 PBOC midpoint                         
                    7.1098   7.1077    
 Spot yuan                             
                    7.2433   7.2416    
 Divergence from                       
 Spot change YTD                       
 Spot change since 2005                
 revaluation                            14.26%
*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

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan              
        *                        -0.15%
 non-deliverable                 1.13%
 forwards              7.0305    

 (Reporting by Shanghai Newsroom; Editing by Subhranshu Sahu)