SHANGHAI, June 25 (Reuters) - The yuan CNY=CFXS ended at 6.7900 against the dollar on Friday, its highest close since its July 2005 revaluation, after the central bank set the daily reference rate at a post-revaluation high in an apparent goodwill gesture ahead of the G20 summit.

The Chinese currency gained 0.5 percent in the first week after China's surprise announcement of a depegging from the dollar, marking the biggest weekly gain since December 2008.

But trading was sluggish with market players cautious over how much the yuan could appreciate in the near term, while none expected the yuan would be able to rise at an annualised pace of more than 20 percent as it did this week.

Weekly volatility in the spot yuan rate versus the dollar hit its highest since mid-2008, when China repegged the yuan to the dollar to help ease the impact of the global financial crisis on its economy.

Spot yuan's range for the week ran to 416 pips and averaged more than 200 pips per day, compared with moves of only a few pips per day during the two-year dollar peg.

Many dealers expect two-way volatility to remain the norm after China's weekend currency policy reform, although the yuan's rise is not likely to be enough to satisfy U.S. lawmakers and other critics who want the yuan to rise as much as 40 percent. China is not expected to accept such a demand.

Beijing told us that any appreciation would be gradual, and that is what is happening, with the reference rate for the yuan against the dollar today set little more than half a percent stronger than where it was last Friday, said Brian Jackson, strategist with Royal Bank of Canada in Hong Kong.

But the rest of the G20 was not born yesterday, and there may be some suspicion that the move over the last week was just window-dressing to take the exchange rate issue off the top of the agenda at this weekend's summit, he said.

To reduce the risk of trade tensions, we will need to see further yuan gains in the days and weeks ahead.

A Reuters poll of 33 economists projected that China would be true to its word and prevent a sharp rise in the newly unshackled yuan, with a median forecast of a 2.4 percent rise over the next year from the level before depegging.

The yuan hit an intraday post-revaluation high of 6.7856 to the dollar in morning trade, up from Thursday's close of 6.7997 and above Friday's central bank mid-point of 6.7896, which was up sharply from Thursday's mid-point of 6.8100.

MIXED SIGNALS

U.S. administration officials and some lawmakers appear to have differing views over the initial rise in the yuan.

U.S. President Barack Obama said in Washington on Thursday that China had made progress by announcing greater currency flexibility, but it was too early to tell if the yuan's rise would be enough to help rebalance world growth.

We did not expect a complete 20 percent appreciation overnight, for example, simply because that would be extremely disruptive to world currency markets and to the Chinese economy, Obama said.

A U.S. lawmaker said on Thursday, however, that the United States should keep open a bill that would pressure China to raise the value of its currency.

I think we need to keep that legislation on the burner. I think whether we act on it will be affected by what China does, House of Representatives Ways and Means Committee Chairman Sander Levin told reporters.

China announced over the weekend that it would allow the yuan's exchange rate to move more freely but it has made clear that its currency reform would be gradual and controllable.

It is widely believed in the domestic market that China will not make any further concessions and that fresh pressure from U.S. lawmakers would very likely backfire due to more volatile market and economic conditions since the global financial crisis.

The euro zone's debt woes have cast doubt on the pace of China's economic recovery, reminding Beijing how vulnerable the world's third-largest economy is to a global slowdown.

Chinese economists often argue that Western critics underestimate that vulnerability, especially given how far China's per capita income lags developed countries.

They say it may be inappropriate to apply Western standards to the currency of a country whose per capita GDP is only one-20th that of the United States.

Caution about Beijing's stance was reflected in the offshore forwards markets. Benchmark dollar/yuan one-year non-deliverable forwards (NDFs) rose to 6.6735 bid late on Friday from Thursday's close of 6.6670, with implied yuan appreciation over that period falling to 1.74 percent from 2.14 percent the previous day. (Editing by Edmund Klamann)

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