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SHANGHAI: China's yuan weakened against the dollar on Friday, as unexpectedly strong inflation data bolstered US rate hike expectations but the currency found some support from brisk domestic credit growth figures.

Prior to market open, the People's Bank of China set the midpoint rate at a two-week low of 6.3681 per dollar.

The yuan opened at 6.3604 per dollar and was changing hands at 6.3652 at midday, 126 pips weaker than the previous late session close.

That weakness comes as the dollar index jumped roughly 0.4% to a one-week high on strong US inflation data.

China Yuan edges up as markets await US inflation data

US consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years, fueling financial markets speculation for a hefty 50 basis points interest rate hike from the Federal Reserve next month.

The yuan's weakness was limited by hopes of stronger economic recovery following robust credit data.

New bank lending in China more than tripled in January from the previous month, beating forecasts and hitting a record high, as the central bank seeks to shore up slowing growth in the world's second-largest economy.

Chinese benchmark treasury futures fell to a one-month low on Friday as bond yields rise.

"The knee-jerk reaction of higher bond yields ... was a positive sign from macro perspective as it shows that the consensus on easing credit may have been formed," wrote Tommy Xie, head of Greater China Research at OCBC Bank.

"Chinese government has put action where its mouth is" A trader at a Chinese bank said "in the short term, the yuan has little reason to depreciate a lot, as dollar settlement remains active."

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