FOREX-Dollar steady ahead of Fed minutes as China's yuan breaches key level

(Changes dateline, writes through, adds comment)

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Fed minutes expected to show central bank divided on 2026 policy

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Dollar index poised for steepest annual drop in eight years

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China yuan breaches key level against dollar

By Dhara Ranasinghe and Ankur Banerjee

LONDON, Dec 30 (Reuters) - The dollar was steady on Tuesday ahead of the release of the minutes from the Federal Reserve's December meeting, while China's yuan strengthened through a key psychological level against the U.S. currency.

End-of-year holidays thinned ?liquidity as traders anticipated the dollar could remain under pressure. This year, it is set for its worst performance since 2017 with a fall of almost 10%.

Some analysts said the ?minutes from the Fed's December meeting, when the central bank cut rates, could reinforce expectations for further easing, while traders have ?priced in two more cuts for 2026.

EURO AND STERLING ARE ON TRACK FOR YEARLY GAIN

The ?euro was last at $1.1767, set ?for a yearly gain of almost 14%, while sterling fetched $1.3508 and was poised for an increase of 8% in 2025.

The dollar index, which measures the U.S. currency against rivals, ?headed for a 9.6% annual drop, its steepest decline in eight years ?due to Fed rate-cut bets, shrinking interest rate differentials against other currencies and concerns about fiscal deficits and political uncertainty.

It was last trading at 98.03, not far from last week's three-month lows.

MUFG strategists expect the ?dollar index to decline by 5% next year, noting the U.S. ?economy and the ?direction of monetary policy are likely to be the main drivers.

But others cited the stabilisation of the dollar in recent months, and limited scope for the Fed to cut rates much further.

"We think the dollar is going ?to range trade around current levels versus the key crosses," said Zurich Insurance Group's chief market strategist Guy Miller.

"We've pretty much moved sideways since the summer period, certainly against the Swiss franc and the euro."

YUAN BREACHES KEY LEVEL China's onshore yuan pierced the psychological level of seven to the dollar for the first time in 2-1/2 years, defying weaker central bank guidance, as exporters rushed to sell dollars year-end. The yuan hit 6.9951 per dollar, the strongest since May, 2023. It has gained roughly 5% against a softening dollar since ?early April ?and is set to snap a three-year losing streak. China's central bank has sought to prevent the yuan from overshooting through weaker guidance rates and verbal warnings in state media, but has failed to reverse the currency's strengthening trend.

The ?yen meanwhile fetched 155.96 per dollar, inching away from levels that drew verbal warnings from officials in Tokyo and sparked worries in the market about intervention. Bank of Japan policymakers debated the need to keep raising interest rates even after a hike in December, with one calling for increases every few months, a summary of opinions showed on Monday, highlighting their focus on inflationary pressures.

Societe Generale chief FX strategist Kit Juckes said the dollar-yen pairing is more about growth expectations than monetary policy.

"That is simply another way of saying that what the yen needs - above all else - is ?stronger GDP growth," he said. Last week, Japan's government projected the economy would expand 1.1% in the fiscal year that ends in March, up from a 0.7% growth estimate in August due to a smaller-than-expected hit from U.S. tariffs.

Growth is expected to accelerate to 1.3% in the next fiscal year as robust consumption and capital ?expenditures offset soft overseas demand, according to the projections.

(Reporting by Dhara Ranasinghe in London and Ankur Banerjee in Singapore; Editing by Barbara Lewis)