The yuan ended up on Wednesday, approaching a key resistance at 6.30 against the dollar as the People's Bank of China tolerated the Chinese currency's rise by fixing a stronger mid-point, traders said.
The market expects the yuan to stage another leg of modest appreciation ahead of a visit to the United States by Chinese leader-in-waiting Xi Jinping in mid-February and to topple its historical trading record high of 6.2919 set in early January.
Still, the currency is not expected to move far stronger than 6.3 and is more likely to pivot in a narrow range in the first quarter as China evaluates the impact on its exports from a weak global economy and the euro zone debt crisis, they said.
"The government will choose to balance political needs and economic reality," said a senior trader at a Chinese commercial bank in Shenzhen. "So the yuan is likely to hit a few record trading highs in the coming two weeks but will still not move far stronger than 6.3."
Spot yuan closed at 6.3067 versus the dollar, stronger than 6.3085 at Tuesday's close after the PBOC fixed a slightly stronger mid-point of 6.3103 against Tuesday's 6.3115.
On Tuesday, the currency staged its biggest single-day rise amid mounting speculation that it would see another leg of appreciation in the next two weeks.
China has long faced pressure from the United States to let its currency appreciate to help balance bilateral trade but it has repeatedly said it needs to decide the yuan's exchange rate in line with its own economic conditions.
US President Barack Obama will host China's likely next leader, Vice President Xi, at the White House on February 14.
In the offshore non-deliverable forward market, one-year NDFs traded at 6.2830 in afternoon trade, implying 0.43 percent yuan appreciation over the next year, compared with a 0.45 percent rise implied at Tuesday's close.