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Asia FX dips, yuan hits 6-mth low as Chinese economic rebound slows

Investing.com -- Most Asian currencies fell on Wednesday, with the Chinese yuan trading at a six-month low on more signs of a slowing economic recovery in the country, while the dollar firmed ahead of a vote to raise the U.S. debt ceiling.

The yuan fell 0.3%, crossing the 7.1 level for the first time since late-November, as data showed manufacturing activity shrank for a second consecutive month in May, and at a sharper pace than the prior month.

The offshore yuan slid 0.4% to 7.1160 against the dollar, indicating weak foreign sentiment towards the Chinese currency.

Overall growth in business activity also contracted, indicating that the Chinese economy was cooling after rebounding in the first quarter of 2023. China’s manufacturing sector - a key driver of local growth, is still struggling to recover despite the lifting of anti-COVID measures earlier this year.

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The yuan was also set to lose nearly 3% in May, making it the worst-performing Asian currency for the month. Still, some analysts speculate that China may be keeping the yuan weak in order to bolster export revenues, amid softening growth.

Anxiety over China spilled over into broader Asian markets, given their dependence on the country as a trading hub. The Taiwan dollar, which has heavy trade exposure to China, fell 0.5%, while the Australian dollar sank 0.4% even as data showed consumer inflation moved back towards 30-year highs in April.

The strong inflation reading came just after Reserve Bank of Australia Governor Philip Lowe warned that sticky prices could invite more rate hikes by the central bank.

The South Korean won fell 0.3% as industrial production and retail sales data disappointed for April, pointing to more economic headwinds in the coming months.

Weak industrial production and retail sales data also weighed on the Japanese yen, which was sitting close to six-month lows against the dollar.

The U.S. dollar, on the other hand, firmed in Asian trade as the weak Chinese data pushed up demand for safe havens. The dollar index and dollar index futures added about 0.2% each, trading close to 10-week highs hit on Monday.

Markets were also on edge over a vote to raise the debt ceiling, after several members of Congress voiced discontent over a bipartisan agreement to raise the government’s spending limit.

The vote, which is set to occur later in the day, comes less than a week before a June 5 deadline for a U.S. default.

Focus was also on nonfarm payrolls data due on Friday, amid growing expectations that the Federal Reserve will hike interest rates further in June.

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