The yen reversed course and sagged against the dollar, while the Australian dollar rebounded on Friday after the People's Bank of China (PBOC) set a higher yuan guidance rate for the first time in nine days.

The dollar was up 0.5 per cent at 118.305 yen, pulling away from a 4-1/2-month low of 117.33 struck overnight as the region's equity markets bounced after a brutal week.

The greenback was still poised to lose 1.7 per cent this week, which saw risk appetite battered globally and benefit the safe-haven yen after China guided the yuan sharply lower, stoking worries about the health of the world's second-largest economy.

"Much of the recent market reaction has been psychological -it is not as if the Chinese economy has gone into a sharp and sudden deterioration. Sure, Chinese shares have weakened, but keep in mind they experienced a big bubble phase quite recently," said Koji Fukaya, president of FPG Securities in Tokyo.

Shanghai shares are on track for a 10 per cent loss this week, pressured by fears of large share sales, worries about the slowing economy and confusion over the country's foreign exchange policy.

"Most psychologically-driven reactions subside after five trading days or so. The yen had gained for five straight sessions, so it may have peaked for the time being," Fukaya said.

The Australian dollar, often used as a proxy for China-related trades, was last up 0.6 per cent at $0.7057. The Aussie, which hit a three-month low of $0.6981 overnight, was still on track to end the week three per cent lower.

The PBOC on Friday strengthened the yuan's midpoint rate for the first time in nine days on Friday, fixing it at 6.5636 per dollar, compared with the previous fix of 6.5646.

As successively weaker fixings rolled out earlier this week, offshore yuan fell to a record low since trading started in 2010 and onshore spot yuan sank to a near five-year trough.

PBOC intervention

While the yuan got some respite on Friday after the PBOC's higher guidance fix and reports it was intervening in the spot market, China was expected to continue allowing the yuan to weaken in the longer term in a bid to help its exporters and remain competitive against its regional rivals, among other incentives.

Moreover, China's central bank is under increasing pressure from policy advisers to let the yuan fall quickly and sharply as its recent gradual softening is thought to be doing more harm than good.

"Managing a stable USD/CNY, monetary policy autonomy, and an open capital account simultaneously will be an extremely difficult outcome to achieve, unless China is prepared to expend more FX reserves," strategists at Barclays wrote.

"There are already signs that China's resistance to CNY depreciation is fading."

China forex reserves

China's foreign exchange reserves, the world's largest, posted their biggest annual drop on record in 2015.

Nearly two-thirds of the drop came between August and December, hinting at the scope of the central bank's attempts to stabilise the yuan after its surprise devaluation in August panicked markets.

US non-farm payrolls data

With much of the focus on China, the US non-farm payrolls report due later in the day was relegated to a sideshow.

A strong report could still shift attention back to the Federal Reserve and prospects of more US interest rate hikes this year.

Against the greenback, the euro was down 0.4 per cent at $1.0883. The common currency, which struggled against the dollar and yen this week, surged 1.4 per cent overnight - its biggest one-day gain in a month.

Traders said the euro may have belatedly found support as a safe haven amid the China-driven tumult.

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