Yuan closes up in strong trade as market prepares for holiday

Chinese authorities have responded to the dramatic fall in the Japanese yen and other Asian currencies in recent weeks by tightening their grip on the yuan and beating back market pressure for the Chinese currency to appreciate.

 In a break with typical practice, the PBOC has guided the yuan slightly weaker over the last two weeks, despite a fall in the dollar versus the euro.

The central bank continued this practice on Tuesday by setting a slightly stronger midpoint despite the fact that the dollar index rose in overnight trade, surprising traders.

"The market expected the central bank to keep weakening the midpoint, so when it strengthened it, that triggered a lot of stop-loss orders," said a trader at a joint stock bank in Shanghai.

He added that the market expects to see more volatility and a wider range in trading quotes in coming days as companies make quick moves to short up their forex positions before markets shut for all of next week.

Transaction volumes increased in the afternoon session after a tepid start, finishing at nearly $20 billion, slightly below Monday's final volume.