China is only three days into its new era of currency flexibility yet it has already succeeded in puncturing market hopes for a money-making surge in the yuan, leaving investors resigned to a glacial rise at best.

While the People's Bank of China (PBOC) did set the yuan's mid-point at a stronger 6.7980 on Tuesday, it did nothing to stop state-owned banks pushing the currency back to 6.8136 per dollar by the close of trading.

Traders suspected the pullback was officially orchestrated as a none-too subtle warning that yuan appreciation would not be a one-way bet, and expectations for Wednesday's fixing were suitably restrained.

I'd expect it to be close to the spot close of 6.8130, said Sean Callow, a senior currency strategist at Westpac. That was the usual pattern from 2005 to 2008.

I am much more interested in what spot does during the day, the fixing just sets the day's range, he added. It went up on Monday, down on Tuesday, so my bet's on higher today.

Whatever the daily gyrations, analysts suspect the yuan will rise over time but likely at too slow a pace to narrow China's huge trade surplus, or America's deep deficit.

The de-pegging story was overblown. It lacked substance given China was never going to make huge inroads into revaluation, said Adam Carr, a senior economist at broker ICAP in Sydney.

More importantly, it over-emphasized the value of the currency in the Chinese/world growth narrative -- an appreciating yuan is not going to rebalance the world, he added.

A Reuters poll of 33 economists forecast the yuan would rise to 6.67 per dollar by the end the year, an increase of just 2.4 percent from late last week and similar to the appreciation implied by offshore non-deliverable forwards.

PLENTY OF ROUBLE ELSEWHERE

Instead, investors were turning to more pressing problems in the rich world, such as the need for painful fiscal tightening in many countries and the spreading risk of deflation.

The euro eased back below $1.2300 once more, while currencies leveraged to global growth like the Australian dollar lost altitude.

The UK became the latest country to announce draconian budget cuts and steep rises in some taxes as it wrestles with exploding national debt.

Debt markets welcome such swingeing cuts but equity investors worry that this will stop economic recovery in its tracks.

U.S. stocks also took a late tumble on Tuesday as domestic economic data disappointed. And rapacious demand at an auction of U.S. treasury notes, even though yields were at a record low, also spoke of growing investor anxiety.

The market used the solid auction results as evidence that there are growing investor fears about weaker growth and further disinflation, said William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Stamford, Connecticut.

He also noted that bank balance sheets were being tightened all across Wall Street, in part ahead of the end of quarter.

The point is, bank balance sheets have probably never been under more scrutiny and uncertainty -- a negative for future growth as banks sit on cash, eschew lending and worry about capital adequacy, said O'Donnell.

(Editing by Mark Bendeich)

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