Prior to market opening on Tuesday, the People's Bank of China (PBOC) set the yuan's midpoint rate at 6.7062 per dollar, 26 pips or 0.04 percent firmer than the previous fix 6.7088.
In the spot market, onshore yuan opened at 6.7150 per dollar and was changing hands at 6.7161 at midday, 26 pips weaker than the previous late session close and 0.15 percent softer than the midpoint.
The onshore spot yuan swung in a thin range of less than 50 pips on Tuesday morning. Traders said some corporate interest in buying dollars emerged when the spot rate rose towards 6.71 per dollar, and such dollar demand dragged the yuan lower. But several traders said the market lacks a clear guidance for now and they expect the yuan to continue trading in tight ranges before the Fed's decision, due early Thursday Asia time.
On Tuesday, the dollar was near a two-week low, dampened by expectations the Fed will adopt a more accommodative policy.
In China, a key market focus remained the Sino-U.S. trade negotiations.
Bill Zhou, analyst at China Construction Bank (Asia) in Hong Kong, said in a note the yuan has largely reflected optimistic expectations for the China-United States trade negotiations but "it will need more positive news to push it up further".
He said he expects the yuan to track the dollar's movements in overseas markets this week, staying in a range of 6.68 to 6.76 per dollar.
Hong Kong's overnight yuan borrowing rate was fixed at 2.73500 percent on Tuesday, the highest level since Nov. 23 and more than 55 basis points up from the previous fix of 2.18133 percent.
The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) is set by the city's Treasury Markets Association (TMA).
A rise in the overnight borrowing costs means signs of liquidity tightness, which could raise the cost of shorting the yuan in offshore markets.
Some traders said the sudden tightness was largely due to quarter-end seasonal demand and they have not yet seen impact on spot trade.
Separately, traders said spot onshore yuan trade was not affected by downbeat FX sales data released late Monday showing
China's commercial banks sold a net $15.0 billion of foreign exchange last month, compared with a net purchase of $12.1 billion in January.
Net sale of FX from commercial banks to their clients could indicate capital outflows, but traders said the data might have been distorted by the week-long Lunar New Year holiday, which fell in early February.
The global dollar index was at 96.416 at midday, from the previous close of 96.524.
The offshore yuan was trading at 6.717 per dollar as of midday.