The image I generated seems to use MD5 for root password hashing.
I understood this from the /etc/shadow file in the image., the file has following line:

    root:$1$b7X30f8f$au21weqL.9.ExM4N84AtA0:18614:0:99999:7:::

Is there an OE config I can change to change password hashing from MD5 to SHA256?

I am using Thud version.

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Regards,
Sourabh