Traders said yuan appreciation appears to be still on the cards, although some narrow-band fluctuations may be seen in the near term, due to the movements of global currencies.

"It is only a short-term correction, as the yuan has climbed relatively fast over the past month, and the currency will continue on its ascending path for the rest of this year," said a trader at a medium-sized bank in Shenzhen.

Spot yuan was trading at 6.4387, weaker than Monday's close of 6.4340. It has now appreciated 6.02 percent since it was de-pegged from the dollar in June 2010 and 2.35 percent so far this year.

Before trade began the PBOC fixed the yuan's mid-point at 6.4419 against the dollar, weaker than Monday's record high of 6.4399.

Dealers said a weaker-than-expected recovery in the US economy and lingering fears over a US credit downgrade could drag on the dollar in the future.

"The deal having been struck does not represent that the US debt issue has been solved thoroughly," said a trader in a state bank in Shanghai.

"And a weakening dollar may add fuel for yuan appreciation in coming months," he added.

Initial euphoria about the US Congress agreeing on a deal to raise the government's statutory borrowing limit faded as investors worried that the country might still lose its triple-A credit rating even though the risk of a default appeared to be off the table.

Chinese economists also said US debt woes still threaten the global economy despite a last-minute deal struck by the White House and political party leaders, China's main official newspaper reported on Tuesday.

Offshore, benchmark one-year dollar/yuan non-deliverable forwards (NDFs) were bid at 6.3655 by midday, weaker than 6.3600 at the previous day's close.

Their implied yuan appreciation in a year's time fell to 1.20 percent from 1.26 percent.

Copyright Reuters, 2011