SHANGHAI: China's yuan weakened to a two-week low on Wednesday, as the greenback strengthened and as tensions between China and the West weighed.
Prior to market open, the People's Bank of China set the midpoint rate at 6.5228 per dollar, 192 pips weaker than the previous fix of 6.5036.
The yuan opened at 6.5180 per dollar in the spot market and hit 6.5263, lits weakest since March 9, before steadying to 6.5223 at midday, 63 pips weaker than the previous late session close.
The offshore yuan was trading at 6.5237 per dollar.
The safe-haven US dollar approached a four-month high on Wednesday as concerns over a third COVID-19 wave in Europe, potential US tax hikes and escalating tensions between the West and China sapped risk appetite.
Traders and analysts said lockdowns in Europe, potential US tax hikes and the cancellation of EU-China talks on market access all help prompted investors to seek safe haven in the greenback.
"There are quite a few factors that pressure the yuan this week, though market participants would continue to keep an eye on the dollar's direction," said a trader at a foreign bank.
Fewer than three months after it was agreed, progress to seal a deal giving European companies better access to Chinese markets has stalled, with concerns growing that it could unravel.
The United States, the European Union, Britain and Canada imposed sanctions on Chinese officials on Monday for human rights abuses in Xinjiang, and Beijing hit back immediately with broad punitive measures against the EU.
"For the short term, the yuan would probably continue to be weak, even as China's monetary policy will not be particularly loose," said Bruce Yam, forex strategist at brokerage Everbright Sun Hung Kai.
"As US treasury yields rise, Sino-US interest rate gap narrows, dampening the appeal of yuan denominated assets and slowing the foreign inflows into China," he added.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.99, firmer than the previous day's 96.95.
The global dollar index fell to 92.369 from the previous close of 92.409.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7035, 2.70 percent away from the midpoint.