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SHANGHAI: The yuan eased on Wednesday, weighed down by signs that China’s COVID-hit economy is struggling to regain momentum and by lingering concerns over heightened Sino-US tensions over Taiwan.

The currency’s losses were limited, however, by caution ahead of US inflation data later in the global day, which could provide hints to the Federal Reserve’s plans for future monetary tightening and the direction of the dollar.

The People’s Bank of China set the midpoint rate at 6.7612 per dollar prior to the market open, weaker than the previous fix 6.7584.

In the spot market, the yuan opened at 6.7540 per dollar and was changing hands at 6.7567 at midday, 38 pips weaker from the previous late session close.

Data on Wednesday showed China’s factory-gate inflation eased to a 17-month low in July while consumer prices picked up pace, but both figures came in lower than market expectations, adding to market worries that domestic activity remained subdued.

“Non-food prices actually declined in July from their June level, which reflects weak domestic demand,” said Zhiwei Zhang, Chief Economist at Pinpoint Asset Management.

“COVID outbreaks in many cities and the lack of further policy stimulus may have led to weaker growth in July.”

Chinese cities from tropical Hainan, to Xinjiang in the west and far-flung Tibet, have reported COVID-19 outbreaks, and the domestic daily caseload has hovered around 1,000 in recent days.

Yuan edges lower, pressured by COVID, property woes and Taiwan tensions

Zhang’s comments were echoed by Ken Cheung, chief Asian FX strategist at Mizuho Bank, who expects COVID flare-ups, subdued consumption and a grim growth outlook would keep the yuan under pressure.

Analysts from China Construction Bank said geopolitical tensions should also be watched closely.

China is continuing to launch military drills around Taiwan in protest against US House Speaker Nancy Pelosi’s recent visit to the island.

About 20 Chinese navy and Taiwan navy ships stayed close to the median line of the Taiwan Strait as of Wednesday morning, a source told Reuters.

“In the near-term, we expect the heightened geopolitical tensions over Taiwan to gradually die down after Beijing concludes its military drills,” said Kaiwen Wang, China Stragetist at Clocktower Group.

“But, it is highly likely that the frequency of tensions in the Taiwan Strait will increase as Beijing shrugs off the geographical limits to its military drills and as Western politicians feel more emboldened to challenge Beijing with provocative island visits.”

The global dollar index fell to 106.27 from the previous close of 106.374. The offshore yuan was trading at 6.7604 per dollar.

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