China's yuan slipped to a three-week low against the U.S. dollar on Tuesday, dragged down by the country's central bank setting the official guidance at the weakest level in nearly three months as well as worsening capital outflows. A broadly stronger dollar has been putting pressure on emerging markets currencies including the yuan and some traders expect China's central bank to gradually fix the guidance rate weaker.

Prior to the market's opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1069 per U.S. dollar, the weakest level since February 28 but still around 1300 pips stronger than Reuters' estimate. The PBOC has been setting a stronger-than-expected fix for well over a year in what traders said reflected official efforts to stem any sharp, destabilising falls in the yuan. Traders at Citi said the PBOC could look to slowly move the fix down towards the 7.11-7.12 per dollar levels over the coming weeks, effectively keeping the U.S. currency underpinned. The spot yuan opened at 7.2350 per dollar and touched a three-week low of 7.2419 in early trade on Tuesday. It was changing hands at 7.2360 at midday, 18 pips weaker than the previous late session close and 1.82% away from the midpoint.

The currency is down 1.9% this year, pressured by its relative low yields versus other currencies and a struggling property sector. Maybank analysts said in a note that the yuan's weakness could be linked to data showing capital outflows worsening in April. They also noted the tempering of optimism over China's latest housing rescue plan on concerns of insufficient funding to clear a massive stock of housing inventory.

The global dollar index rose to 104.654 from the previous close of 104.565. Market participants are waiting on the release of minutes from the U.S. Federal Reserve's last meeting to gauge its policy path. The offshore yuan was trading 77 pips weaker than the onshore spot at 7.2437 per dollar. The yuan market at 0318 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.1069 7.1042 -0.04% Spot yuan 7.236 7.2342 -0.02% Divergence from 1.82% midpoint* Spot change YTD -1.91% Spot change since 2005 14.38% revaluation *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint.

The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.2437 -0.11% * Offshore 7.022 1.21% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Shanghai Newsroom Editing by Shri Navaratnam)