Market watchers expect the People's Bank of China (PBOC) to follow suit by increasing borrowing cost of its interbank loans, albeit by smaller increments than the Fed's likely move.

Any moves by either the Fed or PBOC that deviated from expectations and changed the US-China interest rate differential significantly would likely affect yuan direction.

Overnight, the dollar climbed to a three-week high against a basket of major currencies, and held most of its gains on Wednesday as traders look to whether the Fed will indicate faster monetary tightening this year.

"The yuan trade still lacked a clear direction, and investors will pay attention to the dollar's movements after the Fed's policy meeting that could provide with some guidance to yuan's movements in the near term," said a trader at a Chinese bank.

The global dollar index, a gauge that measures the unit's strength against six other currencies, fell to 90.263 at midday from the previous close of 90.371.

Prior to market opening, the PBOC set the midpoint rate at 6.3396 per dollar, 150 pips or 0.24 percent weaker than the previous fix 6.3246.

In the spot market, the onshore yuan opened at 6.3350 per dollar and was changing hands at 6.3321 at midday, 31 pips firmer than the previous late session close and 0.12 percent stronger than the midpoint.

Some market participants said they did not expect huge swings in either the greenback or the yuan if Fed Chair Jerome Powell's comments later in the session following the Fed announcement met market expectations.

Many market watchers expect the PBOC to follow the Fed hike with a more modest 5-10 bps increase, but they said such a move

would be largely a symbolic one after China's leaders told parliament this month that would they press ahead with a crackdown on risks to the financial system this year.

In December 2017, the PBOC raised short- and medium-term market rates hours after the Fed's rate decision.

Ming Ming, an analyst at CITIC Securities, said in a note on Wednesday corporate dollar demand remained heavy in February, based on commercial banks net foreign exchange sales.

He added there remained the chance of a rebound in the greenback following the Fed's decision and saw a "high possibility" that the yuan would switch to a depreciating trend from a strengthening trend.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.26, firmer than the previous day's 97.1.

The offshore yuan was trading 0.06 percent weaker than the onshore spot at 6.3285 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 6.451, 1.73 percent weaker than the midpoint.

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