It is among several introduced this year aimed at China, even though the new measure does not mention the country by name, and will also allow the US to take similar measures against other alleged currency manipulators.
Last year a bill in the senate proposed the imposition of an across-the-board tariff on Chinese imports.
'Fundamentally misaligned'
China critics say the government undervalues the yuan by up to 40 per cent for unfair trade advantages, costing thousands of American manufacturing jobs.
The new law requires countries with "fundamentally misaligned" currencies to be identified before they are punished, such as initiating a World Trade Organisation dispute if the misalignment continues for a year.
The bill defines misaligned as government intervention in the markets to alter the value of the currency, or if the government imposes currency controls, among other criteria.
Charles Grassley, a Republican who co-sponsored the bill, said the measure would apply "to any trading partner with [an] out-of-whack currency".
He said it was "a velvet glove with a steel fist inside" because many of the bill's punitive measures will only kick in after six months or a year.