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SHANGHAI: China’s yuan weakened against the dollar on Tuesday, touching a near three-month low, as a resurgence in COVID-19 cases clouds the country’s economic outlook, while the deepening Ukraine crisis boosts geopolitical risks for Beijing.

Meanwhile, a slump in Chinese stocks is triggering capital outflows, as the US Federal Reserve is poised to raise interest rates on Wednesday to tackle inflation.

Onshore yuan fell to 6.3880 per dollar, the weakest since Dec. 10, 2021, before recouping some losses. It was changing hands at 6.3764 at midday.

Prior to market open, the People’s Bank of China (PBOC) set the midpoint rate at a 2-1/2-month-low, fuelling speculation that the central bank is guiding the yuan lower.

“The PBOC appears to be showing its card by setting the midpoint at this level,” said a trader at a Chinese bank.

China’s yuan hits 1-month low as policy easing expectations, COVID resurgence hurt

In the offshore market, the yuan hit the lowest level in 4-1/2 months.

The PBOC disappointed the market by keeping a key policy rate unchanged in its liquidity operation on Tuesday, despite rising virus cases threatening an already slowing economy.

“I think the outbreaks impose downside risk to China’s economy at least in the next few months,” wrote Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“I am surprised the PBOC did not cut the MLF interest rate today,” he said, referring to the medium-term lending facility.

The gloomy economic outlook, Beijing’s crackdown on the tech sector, and rising geopolitical risks knocked China’s benchmark CSI300 Index to a 21-month low on Tuesday, and triggered capital outflows via Stock Connect over the past week.

“We think the US dollar will continue to be supported, attracting capital inflow into US assets,” wrote Sarah Lu, senior portfolio Manager at Manulife Investment Management, citing more frequent bouts of risk aversion and the above-trend growth of the United States.

Scotiabank said in its latest report that the offshore yuan was oversold, as further yuan weakening threatens global financial market stability, while limiting room for further policy easing by Beijing.

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