SHANGHAI, Oct 25 (Reuters) - China"s yuan returned close to the four-month highs struck late last week, amid heavy corporate dollar selling on Monday morning despite expectations that the U.S. Federal Reserve will reduce asset purchases at some point to tighten monetary policy. The yuan opened at 6.3883 per dollar and was changing hands at 6.3832 at midday, slightly firmer than the previous late session close. The People"s Bank of China set the midpoint rate at 6.3924 per dollar prior to market open, firmer than the previous fix of 6.4032. Last week, China"s yuan posted its biggest weekly gain against the greenback in five months on the back of strong corporate dollar selling. China"s foreign currency regulator attributed the yuan"s strength to market forces, and a more flexible trading mechanism. "The yuan still has upward momentum, but I don"t think China"s central bank would like to see the yuan sprint past 6.35 against the dollar in one breath," a forex trader at a foreign bank said. If yuan rises above the 6.35 mark, its appreciation could accelerate, Scotiabank said in its latest report. Shanghai-based CIB Research said any potential improvement in strained trade relations between China and the United States could boost the yuan further. But more broadly, markets were awaiting signals on when and how the Fed will begin tightening policy. The dollar index fell slightly after Fed Chair Jerome Powell said on Friday the U.S. central bank should start the process of reducing support for the economy by cutting back on its asset purchases, but should avoid touching the interest rate dial. The yuan market at 4:54AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.3924 6.4032 0.17% Spot yuan 6.3832 6.385 0.03% Divergence from -0.14% midpoint* Spot change YTD 2.27% Spot change since 2005 29.66% revaluation Key indexes: Item Current Previous Change Thomson 100.41 100.49 -0.1 Reuters/HKEX CNH index Dollar index 93.515 93.662 -0.2 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People"s Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.3784 0.08% * Offshore 6.5616 -2.58% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC"s official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by SHANGHAI NEWSROOM; Editing by Simon Cameron-Moore)