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SHANGHAI: China’s yuan briefly touched a two-week high against the dollar before giving back all its gains on Thursday, dragged lower by fresh signs of economic slowdown and worries over wider disruption resulting from a recent COVID-19 resurgence.

The factory and services sectors shrank in March, an official survey showed, contracting simultaneously for the first time since the 2020 peak of the COVID outbreak.

“The decline in China PMIs highlighted the negative impact of lockdowns on production and economic activities,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

“With stronger headwinds on the Chinese growth outlook, more easing measures will be needed to counter downside risks.”

Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate at a near two-week high of 6.3482 per dollar, 84 pips firmer than the previous fix 6.3566 but 15 pips weaker than a Reuters estimate of 6.3467.

In the spot market, the onshore yuan opened at 6.3497 per dollar and rose to a high of 6.3456, the strongest level since March 17, before giving back all the gains to trade at 6.3495 at midday, 10 pips weaker than the previous late session close.

Currency traders said the yuan’s strength in early trade was supported by firmer official guidance and hopes that the war in Ukraine might be entering a phase of de-escalation.

China’s yuan firms to 9-day high, but yield gap pressure remains

But such optimism was quickly overtaken by investor worries about disruption in economic activity.

“Without decisive and concrete actions, such as reserve requirement ratio (RRR) or policy rate cuts, to follow through, growing concerns on growth could start to weigh on CNY more chronically,” analysts at Maybank said in a note.

Authorities in Shanghai appealed for cooperation with tight curbs to stop the spread of COVID-19, saying they recognised. residents’ frustrations as China’s most populous city entered the fourth day of a two-stage lockdown.

“Markets so far have underestimated the severity of the situation in China because it is difficult to (fully) reconcile and understand,” said Lu Ting, chief China economist at Nomura.

“In the next couple of months, we expect global investors to better reflect these shocks in their valuations.”

By midday, the global dollar index had risen to 97.917 from the previous close of 97.792, while the offshore yuan was trading at 6.3581 to the dollar.

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