SHANGHAI: China's yuan rose to its firmest against the US dollar in nearly four months in thin trade on Tuesday, breaching a key threshold, supported by a stronger fixing and broad dollar weakness.

The dollar slipped to its lowest in more than three months against a basket of major currencies, marking its steepest annual drop since 2003, on doubts over durability of a pick-up in US economic growth in the wake of the country's tax overhaul.

The Chinese currency registered a rise of around 6.8 percent against the greenback in 2017, the biggest gain in nine years, also recovering from a roughly 6.5 percent loss a year earlier and reversing three straight years of depreciation.

Prior to market opening on Tuesday, the People's Bank of China set the midpoint rate at 6.5079 per dollar, 263 pips or 0.4 percent firmer than the previous fix of 6.5342 on Friday.

Tuesday's fixing was the strongest since Sept. 11, 2017.

The firmer fixing lifted spot yuan higher. The onshore yuan opened at 6.5030 per dollar, breaching the psychologically important 6.5 per dollar level and rose to a high of 6.4922 at one point, the firmest since Sept. 8.

As of midday, the onshore spot yuan was changing hands at 6.5012, 57 pips firmer than the previous late session close and 0.10 percent stronger than the midpoint.

Its offshore counterpart was trading only 1 pip higher than the onshore spot at 6.5011 per dollar at midday.

Traders said the rally in the yuan on the first trading day of the year was catching up with dollar weakness in overseas markets.

Tommy Xie, economist at OCBC Bank in Singapore, said in a note on Tuesday that gains in the yuan in the past two weeks were mainly driven by "thin liquidity and a weaker dollar".

Trading remained tepid on Tuesday as many market participants were still on holiday. The daily trading volume stood at $7.925 billion, compared with around $15 billion typically.

Xie Yaxuan, an analyst at China Merchants Securities, said he expects the yuan to trade in a range of 6.45 to 6.95 per dollar in 2018, due to the central bank's "counter-cyclical factor", domestic foreign exchange supply and demand, and potential gains in the dollar.

The "counter-cyclical factor" was introduced by the central bank in May 2017, and was designed to reduce price swings and stabilise market expectations.

On a trade-weighted basis, the yuan was largely flat from a year earlier against a basket of currencies of China's trading partners at the end of 2017, according to official data from the China Foreign Exchange Trade System (CFETS).

The index, published on a weekly basis, stood at 94.85 on Friday, up 0.02 from 94.83 at the end of 2016.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.95, firmer than the previous day's 95.89.

The global dollar index rose to 92.183 from the previous close of 92.124.

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 6.6325, 1.88 percent weaker than the midpoint.

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