Yuan ends up, dlr fall may test China policy limit

* Yuan seen creeping higher but lagging global dollar fall

* Waning pressure keeps China easy with stable yuan policy

* Weakening dollar amid stable yuan benefits China's exports

* Benchmark NDFs imply less yuan appreciation in 12 months

SHANGHAI, Sept 23 - The yuan closed up a touch on Wednesday, largely brushing aside a tumble in the dollar as the Chinese central bank showed no intention of allowing the yuan to move freely in line with the U.S. currency's steep fluctuations.

Onshore spot yuan finished at 6.8261, rising slightly from Tuesday's close of 6.8269 after the People's Bank of China (PBOC) set its daily yuan mid-point at 6.8271, only marginally higher than Tuesday's 6.8289.

Globally, the dollar index hit a fresh one-year trough on Wednesday, having lost 15 percent of its value versus a basket of six major world currencies dominated by the euro, since it hit a recent high of 89 in March.

Many market participants now suspect the dollar index may be on track for a full retracement toward record lows of slightly higher than 70.

But the PBOC has used its mid-point, or its reference rate by which spot yuan can move only 0.5 percent in either direction in a day, to keep the yuan nearly flat against the dollar since July last year, mainly to protect China's economy as it confronted a slowdown due to the global financial crisis.

While China's central bank must eventually allow the yuan to appreciate if the dollar's fall becomes too steep, thus causing the exchange rate between the currencies to become unhinged, dealers said the PBOC may only let the yuan gain symbolically in the short term.

"China's exports remain weak and even another 10 percent drop in the dollar globally may not be enough to persuade China to allow the yuan to appreciate sharply," said a dealer at a major European bank in Shanghai.

"The weak exports and China's growing role in the global economic arena have shut up most critics of China's stable yuan policy. A lack of international pressure will also encourage the PBOC to maintain the yuan's stability in the near term."

A stable yuan amid the dollar's global plunge means the yuan is now depreciating against the currencies of many of its trade partners, including the European Union and Asian countries. This will surely give a shot in the arm for China's sagging exports.

The boost will compensate for a decline in exports by China in the first quarter of this year, when a globally strong dollar along with a domestically stable yuan worsened the country's exports, dealers said.

"China's economic policy is deeply based on gradualism, which the government believes will have long-term benefits," said a dealer at a major Chinese state-owned bank in Beijing.

"So the PBOC was not in a hurry to depreciate the yuan when the dollar was strengthening early this year. Similarly, it will not be in a hurry to appreciate the yuan now when the dollar is weakening."

The PBOC's persistence in maintaining a stable mid-point has conveyed a clear message of a stable yuan policy to the market, with even offshore yuan trade now increasingly focused on the policy instead of dollar movements in global markets.

Benchmark offshore one-year dollar/yuan non-deliverable forwards quoted the yuan at 6.7289 bid late on Wednesday, inching up from Tuesday's close of 6.7265.

Twelve-month yuan appreciation implied by the key NDFs, which moves inversely with the forwards, fell slightly to 1.46 percent measured from the Chinese central bank's daily mid-point compared with 1.52 percent implied at Tuesday's close.

Instead of being boosted by the dollar's recent global slide, the NDFs' implied yuan appreciation in 12 months has now dropped sharply from a multi-month high around 2.5 percent in early June.