SHANGHAI: China's yuan pulled back from 3-1/2-month highs against the dollar on Tuesday morning, as an initial boost from a stronger midpoint gave way to rising corporate demand for dollars.

Overall, the dollar was broadly steady against its major trading partners in holiday-thinned trading.

Prior to market opening, the People's Bank of China lifted its official yuan midpoint to the highest level in 3-1/2 months at 6.5416 per dollar, reflecting a strong spot yuan performance a day earlier.

Tuesday's official midpoint, 267 pips or 0.41 percent firmer than the previous fix of 6.5683 on Monday, was the strongest since Sept. 13.

In the spot market, the onshore yuan opened at 6.5425 per dollar and rose to a high of 6.5330 at one point in morning trade, the strongest level since Sept.13.

But as of midday, it had retreated and was changing hands at 6.5540, 132 pips weaker than the previous late session close and 0.19 percent softer than the midpoint.

Traders said corporate dollar demand triggered the sudden turnaround in the spot yuan as clients rushed to take advantage of cheaper dollars.

"The CNY has been overbought with rising risks of technical corrections towards 6.58 in our view," Gao Qi, currency strategist at Scotiabank in Singapore said in a note.

Some market watchers noted that the onshore spot yuan has persistently closed firmer than the same day's official midpoint, and that has led to a stronger fixing on the following trading day. They believe this trend could intensify appreciation expectations for the Chinese currency.

However, traders said many of their peers had already squared their books in the last week of the year, adding that light trading volume has amplified fluctuations in the yuan in recent sessions.

The larger-than-usual shifts in the yuan has boosted its year-to-date gains to around 6 percent against the dollar. It declined roughly 6.5 percent in 2016, the worst annual performance since 1994.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.76, flat with the previous day's 95.76.

The global dollar index fell to 93.262 from the previous close of 93.347.

The offshore yuan was trading 0.02 percent firmer than the onshore spot at 6.5524 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7025, 2.40 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.