SHANGHAI: China's yuan eased against the dollar on Tuesday, as better-than-expected factory manufacturing data and Shanghai's exit from a two-month COVID lockdown failed to offset investor concerns over a persistent economic slowdown.

Factory activity contracted at a slower pace in May as COVID-19 curbs in major manufacturing hubs were relaxed, but movement controls still depressed demand and disrupted production, weighing heavily on the economy in the second quarter.

Analysts at Citi noted that the data should help market sentiment but added that further policy support may be needed.

"Together with lingering uncertainty from zero-COVID strategy and high level of unemployment, only a weak bottoming of growth may be expected in May," they wrote in a note.

China reopening hopes lift yuan to one-week high

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at a near one-week high of 6.6607 per dollar, 441 pips or 0.66% firmer than the previous fix at 6.7048.

In the spot market, onshore yuan opened at 6.6803 per dollar and was changing hands at 6.6678 at midday, 63 pips weaker than Monday's late session close.

If the yuan finishes the late night session at the midday level, it would have fallen 0.88% against the dollar in May, booking the third straight monthly loss.

Currency traders said domestic COVID developments have driven moves in the yuan and market sentiment in May.

Shanghai on Monday announced an end to its two-month long COVID-19 lockdown, allowing the vast majority of people to leave their homes and drive their cars from Wednesday.

Traders said volatility in the yuan was higher over the last two months as lockdowns in cities including the financial hub of Shanghai forced most market participants to work from home.

"Liquidity became low, and that amplified volatility and price moves," said a trader at a foreign bank, adding the situation should improve once they were able to return to the office.

"We expect USD/CNY to range trade in the near term, given a mixed bag of drivers and the zero-COVID policy being a key uncertainty," analysts at ANZ said in a note.

"The CNY is likely to resume gradual appreciation in the latter part of 2022."

By midday, the global dollar index fell to 101.645 from the previous close of 101.668, while the offshore yuan was trading at 6.6779 per dollar.