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SHANGHAI: China's yuan inched higher on Monday on strong seasonal demand, with investors largely shrugging off a surprise cut in one of the country's key policy rates and economic data which pointed to a weak end to the year.

China's economic growth cooled to 4.0% in the fourth quarter from a year earlier, not as much as feared but still the slowest pace in one-and-a-half years, reinforcing market views that policymakers will have to roll out more support measures in coming months.

Minutes before the data was released, the People's Bank of China (PBOC) said it was lowering the interest rate on 700 billion yuan ($110.2 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85% from 2.95% in previous operations.

China's yuan off 2-week high on weaker-than-expected fix and economic slowdown

Though some currency traders and market analysts said the central bank had eased earlier than expected, they said the modest, 10 basis point cut would only put limited downside pressure on the yuan for now.

The currency is being buoyed by strong seasonal corporate demand ahead of the long Lunar New Year holidays which begin at the end of the month.

"Growth stability requires counter-cyclical policy support. Given deteriorating fiscal conditions of local governments, monetary policy should do more than liquidity injections," said Xing Zhaopeng, senior China strategist at ANZ.

"Considering the need of capital flow stability before the 20th party congress in October,the People's Bank of China (PBOC) will not cut rates when Fed starts rate hikes."

Prior to the market opening, the PBOC set the midpoint rate at 6.3599 per dollar, 78 pips firmer than the previous fix 6.3677.

In the spot market, the onshore yuan opened at 6.3568 per dollar and was changing hands at 6.3480 at midday, 51 pips firmer than the previous late session close.

The surprise cut to the one-year MLF effectively pressured the yield premium between the world's two largest economies and dragged the one-year dollar/yuan swap points to a low of 1,190 points, the lowest level since July 2020.

"The PBOC is leaning towards a more dovish stance to counter the headwinds that (are) likely get stronger in the months ahead," said Marco Sun, chief financial markets analyst at MUFG Bank.

"Looking ahead, we expect the PBOC will provide tools to support onshore businesses rather than deploy quantitative easing."

However, some currency traders also said market participants were growing wary of possible tweaks to FX policy, noting the central bank had rolled out measures to curb excess strong one-way bets on the yuan when the spot rate rose past the key 6.35 per dollar level in 2021.

By midday, the global dollar index fell to 95.157 from the previous close of 95.165, while the offshore yuan was trading at 6.3522 per dollar.

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