(Adds onshore close, weekly loss)
SHANGHAI, Jan 23 (Reuters) - The yuan fell to a two-week low against the dollar on Thursday and was set to clock its largest weekly fall in five-and-a-half months, as the spread of a new flu-like virus that forced China to lock down a city of 11 million people.
Fears the outbreak could rapidly worsen put the Chinese currency on course for its first weekly loss in five, and its worst since August in the holiday-shortened Lunar New Year week.
China is putting a transport lockdown on the city of Wuhan, which is considered the epicenter of the new coronavirus outbreak that has killed 17 and infected nearly 600 people, as health authorities around the world work to prevent a global pandemic.
Onshore spot yuan finished domestic trading at 6.93 per dollar, posting the weakest such close since Jan.9. The currency, down 1% week-on-week, is set for the worst week since last August.
The offshore yuan was about 0.3% weaker at 6.9286 per dollar as of 0841 GMT, down about 0.9% from the previous week.
Chinese markets will be closed from Friday for the week-long new year holiday. Trading will resume on Jan. 31.
Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said the lockdown of Wuhan signalled that the actual situation “might be more severe than expected and could cause panic mood in the market”.
“In this sense, market participants will likely re-assess the negative impact of the virus outbreak to the Chinese economy, posing downside risk to the RMB,” he said in a note.
Cheung added that the disruption to the consumer sector from the outbreak could hurt the broad economy given consumption is a key driver of China’s economic growth.
Several onshore traders said they had liquidated all of their positions ahead of the holiday to avoid fluctuations in global markets during the period.
A trader at a Chinese bank said the yuan’s post-holiday movement was likely to be affected by the virus situation.
Stephen Innes, chief market strategist at AxiTrader, noted that capital inflows are expected to return after the holiday, when markets switch their focus back to the Sino-U.S. Phase 1 trade deal. The signing of the deal last week “marked a modest but promising start to lower U.S.-China trade tensions,” he said in a note.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.8876 per dollar, 23 pips weaker than the previous fix of 6.8853.
Separately, currency market reaction was largely muted after the PBOC kept the interest rate on its targeted medium-term lending facility (TMLF) unchanged on Thursday, confounding expectations for a cut. (Reporting by Winni Zhou and David Stanway; Additional reporting by Noah Sin in Hong Kong Editing by Jacqueline Wong and Toby Chopra)