By Summer Zhen

HONG KONG, May 29 (Reuters) - China's yuan strengthened against the dollar on Friday as the greenback retreated following reports of a U.S.-Iran agreement to extend a Middle East ceasefire, lifting risk appetite in Asian currencies.

The United States and Iran reached ​an agreement on Thursday to extend their ceasefire and lift restrictions on shipping through the Strait of Hormuz, sources told Reuters, though pending U.S. President Donald Trump's approval.

The onshore yuan CNY=CFXS was up 0.07% at 6.7705 to the dollar, as of 0246 GMT, after trading in a range of 6.7703 to 6.7750.

In Asian trading, the offshore yuan reached its highest level in more than three years, touching 6.7675 per dollar CNH=.

Prior to the market opening, the People's Bank of China set the midpoint rate CNY=PBOC at 6.8176 per dollar, its strongest since February 14, 2023, and 491 pips weaker than a Reuters' estimate. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

The yuan is currently moving largely in tandem with the U.S. dollar, according to analysts.

The greenback extended its weakness against major currencies on Friday and was on track to end the week lower.

"The next thing to watch is China's PMI data to assess whether the earlier weakening trend in the economy is continuing," Nanhua Futures analysts said in a note.

The yuan is up 0.9% against the dollar so far this month, on track for a second consecutive monthly gain.

The currency has strengthened 3.3% so far this year, supported by a weaker dollar and strong exports.

China's central bank, meanwhile, has instructed banks to boost lending this month, sources told Reuters, underscoring Beijing's continued efforts to support an economy squeezed by higher energy costs and stubbornly weak domestic demand.

The dollar's six-currency index =USD was at 99.01.

LEVELS AT 0245 GMT

INSTRUMENT	CURRENT vs USD	UP/DOWN(-) VS. PREVIOUS CLOSE %	% CHANGE YR-TO-DATE	DAY'S HIGH	DAY'S LOW
Spot yuan CNY=CFXS	6.7705	0.14	3.3	6.7703	6.775
Offshore yuan spot CNH=D3	6.7678	0.09	3.09	6.7675	6.775