China's yuan gave back earlier gains on Monday, pressured by broad dollar strength in global markets and rising seasonal demand for the U.S. currency ahead of a week-long holiday. The dollar extended gains from last week after a still-hawkish Federal Reserve surprised markets by signalling rates would need to stay higher for longer than initially expected to contain price pressures. In the spot market, the onshore yuan opened at 7.2948 per dollar and was changing hands at 7.3057 at midday, 77 pips weaker than the previous late session close.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint, around which the yuan is allowed to trade in a 2% band, at 7.1727 per dollar, 2 pips firmer than the previous fix of 7.1729, the strongest since Aug. 14. The central bank continued its months-long trend of setting the daily official guidance rate with a strong bias, which analysts and traders view as an official attempt to rein in weakness.

Monday's midpoint was 1,256 pips stronger than Reuters estimate of 7.2983. The PBOC has set the midpoint around 7.1730 per dollar for the sixth straight trading session on Monday, capping the yuan's downside limit at around 7.3160. "We should expect policymakers to continue with its strong fix to reinforce a consistent message that it will not tolerate excessive overshoot," said Christopher Wong, FX strategist at OCBC Bank. Dollar demand from households and corporates was strong ahead of the long holiday, traders said. But they added that trading volume was generally low on Monday, as some market participants were already on holiday, while a slew of recent official comments also indicated the authorities were keen to maintain currency stability. Trading volume fell to $3.3 billion around midday compared with typical half-day volume of about $15 billion.

"Such light trading is likely to persist before the National Day holidays," said a trader at a Chinese bank, referring to the week-long public holiday that starts from Sept. 29. While China's domestic financial markets will be closed from Friday, market participants will closely monitor September factory activity data due on Saturday for more clues on the health of the world's second-largest economy. "We think that numbers will likely point to a recovery in September, as policy support and stronger credit growth in August should have boosted business expectations," said Carlos Casanova, senior economist for Asia at UBP.

By midday, the global dollar index traded at 105.578, while the offshore yuan was trading at 7.3075 per dollar. The yuan market at 0343 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.1727 7.1729 0.00% Spot yuan 7.3057 7.298 -0.11% Divergence from 1.85% midpoint* Spot change YTD -5.55% Spot change since 2005 13.29% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 105.578 105.583 0.0 *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 7.3075 -0.02% * Offshore 7.1295 0.61% 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 Jacqueline Wong)