The Chinese currency ended firmer in its late night session last Friday, registering its ninth straight weekly gain - the longest winning streak since early 2013. The yuan has gained 3.2 percent so far this year, after climbing 6.8 percent in 2017.

But recent strength in the yuan has sparked speculation the central bank could reinstate the "counter-cyclical factor", a discretionary factor it introduced into the yuan midpoint formula last year to contain the currency's decline.

"If the dollar index continues to recover while the yuan remains strong against the dollar, moving it higher against the basket of currencies of its trading partners, we would be cautious about the possible reintroduction of the 'counter-cyclical factor,'" said an analyst at a major Chinese bank, who declined to be named.

The Chinese currency edged up 0.03 percent versus the greenback last week, but on a trade-weighted basis rose 0.66 percent against the basket of currencies of its trading partners, according to official data from the CFETS.

The index, published on a weekly basis, stood at 96.92 on Friday.

Tommy Xie, economist at OCBC Bank in Singapore, said in a note on Monday that 97 to 97.50 for the yuan basket index could still be "important level to watch out" this week.

Prior to market opening on Monday, the People's Bank of China set the yuan midpoint rate at 6.3001 per dollar, 193 pips or 0.3 percent firmer than the previous fix of 6.3194 on Friday.

In the spot market, the onshore yuan opened at 6.2959 per dollar and was changing hands at 6.3045 at midday, 76 pips weaker than the previous late session close and 0.07 percent softer than the midpoint.

Traders said market action was tepid with dollar demand from bank clients dragging the yuan slightly lower in morning trade, while market participants were also starting to square their books for proprietary accounts ahead of the holiday.

Households usually purchase dollars ahead of the Lunar New Year for their trips abroad. The week-long holiday starts on Feb. 15 this year.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.87, weaker than the previous day's 97.95.

The global dollar index fell to 90.101 from the previous close of 90.442.

The offshore yuan was trading 0.12 percent weaker than the onshore spot at 6.3123 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 6.445, 2.25 percent weaker than the midpoint.

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