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SHANGHAI: China's yuan eased against the dollar on Wednesday, the first trading session after a long holiday, hurt by growing investor concerns over the worsening economic growth outlook after Shanghai extended its lockdown amid fast rising COVID-19 infections.

The country's financial hub asked all of its 26 million residents to take another round of COVID tests on Wednesday, adding that lockdown curbs will continue until the exercise is complete.

Such lockdowns and mobility restrictions have weighed heavily on activity in China's services sector, which contracted at the sharpest pace in two years in March, a private sector survey showed on Wednesday, adding to investor worries over wider disruptions in the broader economy.

"What seems clear now is that achieving the 5.5% growth target, set by the government work report, is facing increasing headwinds, as China's GDP will be under more pressure than earlier expected for Q1 and more uncertainties will probably arrive in the following quarters," Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, said in a note.

She expects the recent sharp reduction in mobility to shave off 1.8 percentage points from China's GDP growth in the first quarter.

Prior to the market opening, the People's Bank of China (PBOC) set the yuan's midpoint rate at 6.3799 per dollar, 290 pips weaker than the previous fix 6.3509 and 6 pips weaker than Reuters' estimate of 6.3793. In the spot market, the onshore yuan opened at 6.3720 per dollar and was changing hands at 6.3678 at midday, 58 pips weaker than the previous late session close.

Several currency traders said a buoyant dollar also added pressure on the yuan, as Federal Reserve Governor Lael Brainard's hawkish remarks raised possibility of more aggressive US monetary tightening this year.

"The Fed is determined to curb inflationary pressure via the aggressive monetary tightening," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Yuan briefly hits 2-week high but sluggish PMIs, COVID weigh

"Overall, the widening divergence between growth momentum and monetary policy cycle between China and other major economies will likely add more downside pressure on the RMB, in our view."

The yield gap between China's benchmark 10-year government bonds and their US counterparts shrunk to about 19 basis points on Wednesday, the lowest level since 2010.

But the easing yuan was capped by some corporate conversion of their FX receipts in the yuan in morning deals, traders said, after the spot yuan weakened towards the psychologically important 6.38 per dollar.

By midday, the global dollar index rose to 99.574 from the previous close of 99.472, while the offshore yuan was trading at 6.3753 per dollar.

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