China's yuan eased on Thursday from the previous day's two-week high as rising Covid-19 infections and fresh lockdowns added to worries about the country's slow and uneven economic recovery.
The currency was also pressured by a pledge from the People's Bank of China (PBOC) to maintain ample liquidity in the financial system, offsetting the impact of broad dollar weakness following lower-than-expected US inflation readings.
Covid cases continued to rise, with 2,166 new infections reported on Wednesday, nearly double the figure a day earlier. While very low by global standards, China continues to enforce a tough "dynamic Covid-zero" policy even for small outbreaks.
Currency traders said stringent anti-virus measures could again disrupt the economy, just as many businesses and consumers are clawing their way back from extended lockdowns in spring which sent activity into a tailspin.
Prior to the market opening, the PBOC set the midpoint rate at 6.7324 per dollar, 288 pips or 0.43% firmer than the previous fix of 6.7612, the strongest since July 14.
In the spot market, the onshore yuan <CNY=CFXS> opened at 6.7300 per dollar and was changing hands at 6.7389 at midday, 144 pips weaker than the previous late session close.
The yuan hit a high of 6.7230 late on Wednesday, the loftiest level since July 28, as the dollar eased following a cooler-than-expected US inflation report. The data raised expectations of a less aggressive Federal Reserve interest rate hike cycle than previously anticipated.
"It remains early too early to say the US inflation peaked," said a trader at a foreign bank, noting changes in US inflation, a key factor deciding the Fed's monetary tightening trajectory, would continue to affect the dollar and other major currencies.
Meanwhile, China's central bank reiterated that it would step up the implementation of prudent monetary policy and keep liquidity reasonably ample.
Widening divergence in monetary policy between China and other major economies could risk capital outflows and yuan depreciation.
"We believe that China rates should stay low given the risk to growth being on the downside," strategists at Morgan Stanley said in a note this week.
"But we are less bearish on the yuan as it is more driven by the balance of payments these days rather than China growth," they said, expecting the PBOC to keep the yuan stable ahead of the politically significant 20th Party Congress later in the year.
By midday, the global dollar index stood at 105.376, while the offshore yuan was trading at 6.7368 per dollar.