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SHANGHAI: China’s yuan firmed against a weakening dollar on Friday, after swinging sharply between gains and losses, and was set for a weekly drop against the greenback as new data highlighted the challenges confronting the country’s economy.

The global dollar index has extended a fall from a 20-year high this week, hitting a one-month low of 101.43 on Friday as traders reconsidered bets on aggressive tightening by the US Federal Reserve.

But the yuan’s gains have not kept pace as coronavirus lockdowns continue to hobble activity in the world’s second-largest economy.

Profits at China’s industrial firms fell at their fastest pace in two years in April, data from the National Bureau of Statistics showed on Friday, with high raw material prices and supply chain chaos caused by COVID-19 curbs squeezing margins and disrupting factory activity.

Traders said market worries about the lack of economic momentum domestically would keep the yuan under pressure, but diverging investor views were heightening exchange rate volatility.

“Overseas the feeling is China’s economy is weak. The offshore yuan is biased weaker and that’s dragging on the onshore yuan,” said a trader at a Chinese bank. “At the moment the yuan is swinging back and forth too much, and even if you’re positioned right you’re not necessarily making money.”

Yuan hits near one-week low

On Friday, the People’s Bank of China (PBOC) set the yuan’s daily midpoint at 6.7387 per dollar, its softest in a week.

Onshore spot yuan opened at 6.7600 per dollar, its weakest point of the day before firming nearly 400 pips to 6.7205.

By midday its gains had moderated and it was changing hands at 6.7365 per dollar, just 14 pips firmer than Thursday’s late session close.

The offshore yuan strengthened to 6.756 per dollar.

Raymond Yeung, Greater China chief economist at ANZ, said that China’s lockdowns have been one of the key contributing factors to recent weakness in global equities and FX volatility, with recent large consecutive monthly outflows from yuan bonds pushing the currency down further.

That may continue amid Chinese President Xi Jinping’s insistence on maintaining the country’s stringent zero-COVID policy.

“Even with small number of cases the authorities may call for high-intensity restrictions that will dampen economic activities, posing a major policy uncertainty in the region,” he said in a note.

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