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China's yuan weakens as economy struggles; U.S. inflation in focus

SHANGHAI, Aug 10 (Reuters) - 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-U.S. tensions over Taiwan. The currency's losses were limited, however, by caution ahead of U.S. 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 CNY=PBOC at 6.7612 per dollar prior to the market open, weaker than the previous fix 6.7584. In the spot market, the yuan CNY=CFXS 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. 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 U.S. 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 .DXY fell to 106.27 from the previous close of 106.374. The offshore yuan CNH=D3 was trading at 6.7604 per dollar. The yuan market at 4:31AM GMT: ONSHORE SPOT: Previous Spot yuan CNY=CFXS Divergence from midpoint* Spot change YTD Spot change since 2005 revaluation Key indexes: *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC. (Reporting by Jason Xue and Brenda Goh; Editing by Kim Coghill) ((;)) The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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