China's yuan firmed on Tuesday after the central bank set its daily fixing stronger than market expectations for the second day in a row, bolstering speculation authorities were becoming less tolerant of the currency's weakness.

The stronger fixing coincided with state-owned banks selling dollars in the offshore spot foreign exchange market, sources said on Tuesday, indicating authorities want to slow the pace of yuan decline. The People's Bank of China (PBOC) set the yuan midpoint rate at 7.2098 per U.S. dollar prior to market open, weaker than the previous fix 7.2056, but nearly 100 pips stronger than Reuters' consensus estimate.

The fixing was the biggest upward deviation the PBOC has made since May when the current yuan selloff began, analysts said. The spot yuan opened at 7.2400 per dollar and was changing hands at 7.2132 at midday, 293 pips stronger than the previous late session close and 0.05% weaker than the midpoint. The PBOC allows the yuan to trade as much as 2% above or below the fixing on any given day.

"After two consecutive days of sizeable deviation in the fixing, it appears to be a signal that the PBOC is pushing back more strongly," said Alvin Tan, head of Asia currency strategy at RBC Capital Markets. The yuan has slid more than 4% against the dollar so far this year. It has been weighed down by faltering economic growth and a wide interest rate differential between China and the U.S. While China has eased monetary settings, analysts said modest interest rate cuts alone would have limited impact in stimulating household demand without fiscal support measures.

The uneven nature of economic recovery from the pandemic led S&P Global on Monday to cut its forecast of Chinese gross domestic product for this year to 5.2% from 5.5%. "The fixings suggest some low but rising discomfort with the pace of depreciation, and may help to slow the (yuan fall) from there," Citi analysts said in a client note on Tuesday. Currency traders said they saw state banks selling dollars on Monday just ahead of the onshore domestic close (0830 GMT) to shore up the yuan's closing price, as the closing price can determine the next day's fixing. The global dollar index fell to 102.573 from its previous close of 102.692. The offshore yuan was trading 0.04% weaker than the onshore spot at 7.2163 per dollar. The one-year forward value for offshore yuan traded at 7.0041 per dollar, indicating a roughly 3% appreciation within 12 months.

The yuan market at 1:58AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint -0.06% 7.2098 7.2056 Spot yuan 0.34% 7.218 7.2425 Divergence from midpoint* 0.11% Spot change YTD -4.41% Spot change since 2005 revaluation 14.66% OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan * -0.07% 7.2227 Offshore non-deliverable 7.011 2.84% 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 Georgina Lee; Winni Zhou; Editing by Sam Holmes and Christopher Cushing)