SHANGHAI: China's yuan weakened on Thursday after minutes from the March meeting of the US Federal Reserve indicated widespread support for large rate hikes, boosting the greenback.

The meeting minutes helped to lift the US dollar index to its highest since May 2020 overnight, at 99.778.

It was last at 99.572.

Before the market open, the People's Bank of China set the yuan's midpoint rate slightly stronger than expected, at 6.3659 per dollar, its firmest since April 1.

Spot yuan opened at 6.3592 per dollar and firmed slightly in early trade before turning weaker.

China's yuan weakens as Shanghai lockdown adds to worries over slowing economy

Traders said foreign exchange sales by corporates provided some support, but overall turnover remained low amid a continued lockdown in Shanghai, China's financial centre.

Shanghai on Thursday said it was trying its best to improve the distribution of food and essential goods to locked-in residents as discontent grew with COVID-19 curbs entering an 11th day.

By midday, the yuan was changing hands at 6.3621 per dollar, 33 pips weaker than Wednesday's late session close. The offshore yuan also weakened, to 6.3675 per dollar from a close of 6.3595.

A trader at a Chinese bank said spot yuan remained very steady, though swaps were expectd to come under pressure under the influence of narrowing China-US spreads.

On Thursday, the spread between the benchmark Chinese and US 10-year government bond yields stood at 20 basis points, having narrowed to as little as 8 basis points a day earlier.

In a commentary in the official Shanghai Securities News on Thursday, a former foreign exchange regulator said that the yield spread between US and Chinese bonds was likely to narrow even further, or could even invert.

"The divergence in US and Chinese monetary policy will further tighten the China-US spread, slowing foreign capital inflows and even leading to capital outflows," said Guan Tao, global chief economist at BOC International and a former official at the State Administration of Foreign Exchange (SAFE).

"But net capital outflow does not necessarily lead to yuan depreciation ... If Fed tightening exacerbates geopolitical risks, although this may increase the capital flow shock that China encounters, foreign exchange assets accumulated by the private sector can play a 'reservoir' function to better regulate the balance of payments," Guan wrote.