Despite the pullback, dealers expected the yuan to continue its recent rises, possibly appreciating 5 to 6 percent in 2011, partly because China appears to be using the currency as a tool to help tame inflation.

The PBOC has fixed a slew of record high mid-points since the start of this year, indicating the government may be allowing the yuan's exchange rate to appreciate to help fight inflation, partly propelled by high global commodity prices.

A PBOC report published over the weekend forecast that major global commodity prices would remain at high levels in 2011, creating the threat of structural inflation.

Traders interpreted the PBOC statement as a signal that China would continue to regard controlling inflation as a key task for the country this year -- a policy that top leaders, including Premier Wen Jiabao, has reiterated many times.

"We don't see a let-up of the government's anti-inflationary campaign any time soon," said a dealer with a Chinese commercial bank in Shanghai.

"As the yuan is apparently part of the tools for the campaign, rises are likely to continue even with pullbacks from time to time."

The yuan was trading at 6.5618 versus the dollar at midday, down from 6.5576 at Friday's close, when it hit an all-time trading high of 6.5549 in intraday trading. It has now risen 4.03 percent since it was depegged in June 2010, and 0.43 percent so far this year.

Before trading began, the PBOC fixed the yuan's mid-point  at 6.5618, slightly weaker than the central bank's record high fixing at 6.5580 set on Friday.

In letting the currency rise, the PBOC has adopted a tactic of taking two steps forward, one step back, partly to frustrate speculators.

China's consumer price inflation has lingered around 5.0 percent since late last year. The official People's Daily said on Monday that China would be able to cap inflation below the full-year target of a 4 percent average rise in prices.

The newspaper cited a number of factors as favorable to slowing the upward momentum of consumer prices, including an oversupply of industrial products, abundant grain stocks and large foreign currency reserves.

As the main newspaper of China's ruling Communist Party, the People's Daily commentary reflects growing confidence in Beijing that the government has inflation under control, traders said.

Amid the battle to curb inflation, the yuan is set to rise by about 5 percent this year, the president of Bank of China Ltd , the country's No.3 lender and largest foreign exchange bank, said on Friday.

Offshore, benchmark one-year dollar/yuan non-deliverable forwards were bid at 6.4410 at midday, up slightly from 6.4340 at Friday's close. Their implied yuan appreciation in a year's time fell to 1.88 percent from 1.99 percent.

Since the start of this year, NDF-implied yuan appreciation has persistently lagged market expectations of a 5 to 6 percent rise in 2011 partly because hedge funds, the main players in forwards, cut back exposure to Asian markets in favour of dollar assets as the US economy recovers, traders said.