Yuan softens: The yuan dipped on Friday against the US dollar as China's factory activity continued to reflect manufacturing challenges, while investors awaited signals from the annual session of the country's parliament for further policy insights.

Data released on Friday indicated that China's factory activity contracted for the fifth consecutive month in February, while the services sector saw an uptick in expansion.

Analysts at UBS noted that while the data may be influenced by the Lunar New Year holiday, it underscores the ongoing manufacturing weaknesses and warrants a cautious outlook on China's economic recovery.

Philip Wee, senior FX strategist at DBS, observed that the yuan had been held below 7.20 against the dollar in February, suggesting China's aim to maintain stability as it approaches the annual meetings next week.

China's National People's Congress (NPC) is scheduled to commence on March 5, where investors will closely monitor economic targets and policy priorities for the year ahead.

Moody's Analytics economists highlighted that officials might be hesitant to adjust interest rates, considering the yuan's struggles since the beginning of 2023. 

They anticipated a potential strengthening of the yuan as China's recovery progresses, especially if the US implements rate cuts, narrowing the interest rate differential.

Before the market opened, the People's Bank of China set the midpoint rate for yuan trading at 7.1059 per U.S. dollar, slightly weaker than the previous fix.

The spot yuan opened at 7.1910 per dollar and traded at 7.1947 at midday, showing a slight weakening compared to the previous late session close.

Meanwhile, the dollar remained stable on Friday following data indicating persistent but gradually easing US inflation, keeping alive the possibility of rate cuts by the Federal Reserve in June.

The global dollar index saw a slight decrease from its previous close.

Offshore yuan trading showed a 159-pip weakness compared to onshore spot trading, standing at 7.2106 per dollar.

(With Reuters Inputs)