The central parity rate of the Chinese currency renminbi, or the yuan, strengthened to a five-month high Tuesday.
The central parity rate strengthened 309 pips to 6.8954 against the U.S. dollar, which was its strongest since Aug. 1 last year, according to the China Foreign Exchange Trade System.
This came after the United States has dropped its designation of China as a currency manipulator.
Noting the U.S. Treasury Department assessed developments over the last several months with China and its currency practices, Treasury Secretary Steven Mnuchin said "China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability."
The dollar index, which measures the greenback against six major peers, dipped 0.02 percent to 97.3470 at 2000 GMT.
The anticipated signing of the phase-one economic and trade agreement between China and the United States this week boosted market optimism about a stronger yuan, said Wen Bin, chief analyst at China Minsheng Bank.
The stronger yuan was also underpinned by China's improving economic momentum as effects of the government's intensified countercyclical adjustment since the second half of 2019 gradually filtered through, Wen said.
In the spot forex market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day. The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.
As China continued to open up its financial markets, overseas investors would show growing enthusiasm, which would lead to capital inflows and lift the exchange rate of the yuan, Wen said.
He expected the yuan's exchange rate to maintain two-way fluctuations within a reasonable and balanced range as the country continued to improve the exchange rate formation mechanism to better reflect the supply and demand in the forex market.