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SHANGHAI: China’s yuan weakened against the US dollar on Wednesday as investor concerns about slowing growth in the world’s second-largest economy outweighed a softer greenback, as the country continues to grapple with the spread of COVID-19.

“The yuan will likely be range-bound in the near term, with the impact of the domestic COVID situation quite clear. However, the dollar is also correcting,” said a trader at a Chinese bank.

The dollar hit a nearly one-month low overnight amid a decline in benchmark Treasury yields, while the euro hit a one-month high after European Central Bank President Christine Lagarde said euro zone interest rates will likely be in positive territory by the end of the third quarter.

While China on Wednesday reported a decrease in COVID-19 cases from a day earlier, the country’s financial centre Shanghai remains largely paralysed by a city-wide lockdown now in its seventh week, while Beijing has ramped up quarantine efforts.

Such lockdowns have weakened an already faltering economy, prompting global investment banks to slash their growth outlooks for China in 2022, and spurring the authorities to roll out targeted easing measures and pledge more support.

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The People’s Bank of China (PBOC) has also kept cash conditions loose, driving front-end market rates lower in a pattern echoing the initial outbreak of COVID-19 in early 2020, analysts at Goldman Sachs said.

“After the COVID situation became under control and economic growth rebounded, the PBOC drained liquidity and CNY rates rose sharply. This precedent event raises questions (of) whether rates have now bottomed in this cycle,” they wrote.

The one-week Shanghai interbank offered rate has in recent days been quoted near lows last seen in the first half of 2020, and was last at 1.785%.

The yuan’s weakness on Wednesday came despite the PBOC setting its daily midpoint at 6.655 per dollar, the firmest since May 6.

Onshore spot yuan opened at 6.6600 per dollar and eased to 6.6668 by midday, 128 pips or 0.2% softer than Tuesday’s late session close. The offshore yuan weakened to 6.6715 per dollar from a close of 6.6569.

While the dollar has since May 13 retreated nearly 3% from a 20-year high against its global peers, the Chinese currency’s gains against the greenback have not kept pace.

At the same time, the yuan’s relative stability against a trade-weighted currency basket suggests the central bank may yet tolerate further yuan weakness to support the economy, said Wei He, China economist at research firm Gavekal.

Reuters calculations put that basket index at 100.75 on Wednesday morning, down just 0.05% since May 13.

“Whether the PBOC’s current hands-off tactics continue depends mainly on its judgment as to whether the renminbi is overvalued,” He said in a note.

“There is certainly space for the CFETS index to continue its decline, which would help Chinese exporters to regain some competitive advantage and relieve financial pressures from weak economic growth.”

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