(Adds details and comments, updates domestic closing prices)
SHANGHAI, Sept 16 (Reuters) - China's yuan weakened past the psychologically important 7 per U.S. dollar level for the first time in two years on Friday, pressured by a buoyant greenback and strong market expectations for an even more aggressive U.S. interest rate hike next week.
The onshore yuan finished the domestic trading session at 7.0166 per dollar, down nearly 0.3% on the day and the weakest such close since July 14, 2020. Its offshore counterpart was trading at 7.0316 around 0830 GMT.
Friday marked only the third time the tightly managed yuan has been allowed to breach the 7 mark since the global financial crisis of 2008, and in the past authorities have often been quick to step in and defend it.
Crossing the level could stoke fear of capital outflows just as authorities want to marshal resources to revive an economy reeling from COVID-19 outbreaks and a deepening property crisis.
Prior to the market open, the People's Bank of China (PBOC) set the yuan's midpoint rate at 6.9305 per dollar, 204 pips or 0.3% weaker than the previous fix.
The sizable pullback in Friday's fixing indicates the central bank might have allowed the yuan to cross the 7 mark, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
"As long as the pace of depreciation is not too fast and remains under control, it should be fine."
Several currency traders said they now see 7.1 to 7.2 per dollar as their next target, while 7 has turned into a resistance level, as broad dollar strength should continue to weigh on most emerging market currencies.
The last time the yuan broke 7 was in 2020 during the early days of the COVID-19 pandemic. It also briefly fell through that mark as the U.S.-China trade war intensified in 2019.
While the U.S. Federal Reserve and most other major central banks have been sharply hiking rates this year to battle inflation, China has been cautiously easing policy to shore up economic activity, wary of triggering capital flight, analysts say.
Highlighting outflow risks, official data showed overseas investors cut holdings of Chinese bonds for a seventh consecutive month in August.
Some better-than-expected economic data lent slight support to the currency, as factory output and retail sales growth surprised on the upside, shoring up the shaky recovery from the crippling effects of COVID curbs and heatwaves. But a prolonged property slump and cooling export demand are weighing on the outlook.
Several state media outlets published commentaries on the yuan that played down any significance of the key 7 level.