Chinese officials have said all along that any reforming of the yuan, also known as the renminbi (RMB) or "people's money", will be gradual.
The announcement, timed just before Hu Jintao, China's president, attends the G-20 summit in Toronto, Canada, follows warnings from Beijing earlier this week against making its currency policies a main focus of the meeting.
Beijing, which kept the yuan frozen against the dollar to help Chinese manufacturers compete amid weak global demand in the wake of the 2008 financial crisis, faces pressure from the US and other trading partners who contend the yuan is undervalued.
US welcomes move
Barack Obama, the US president, who pressed China over the yuan in a letter released on Friday welcomed the move towards removing the dollar peg in an indication of the danger of a market-roiling confrontation at the G20 summit.
"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," he said.
The European Commission also welcomed the decision, as did the International Monetary Fund.
But Beijing's announcement is unlikely to satisfy critics in the US congress, who argue that an undervalued yuan gives China's exporters an unfair advantage and have threatened to penalise China for it.
"This vague and limited statement of intentions is China's typical response to pressure," said Charles Schumer, a US senator from Obama's Democratic party and a leading critic of China's currency policy.
"Until there is more specific information about how quickly it will let its currency appreciate and by how much, we can have no good feeling that the Chinese will start playing by the rules," he said, pledging to press ahead with legal action to raise trade barriers.
China, which has held the yuan at roughly 6.83 to the dollar since July 2008 in a move it defended as a source of stability during the recent global financial crisis, has come under intense criticism from abroad as its export juggernaut has roared back to life.
|Critics say keeping the yuan artificially cheap gives Chinese exports an unfair edge [Reuters]
Much of the rest of the global economy remains sluggish and beset by unemployment in the wake of the financial crisis, and China's policy is seen as stealing jobs from foreign markets.
In particular, by keeping the yuan artificially cheap against the dollar, China makes its imports more attractive for US consumers while making US exports to China more costly, critics say.
That has contributed to a massive surplus in China's trade account with the US, sparking protests that the policy is at the direct expense of American jobs.
Timothy Geithner, the US treasury secretary who has delayed publication of a potentially embarrassing report that could cite China as a currency manipulator, also stressed that China's actions would speak louder than words.
"This is an important step but the test is how far and how fast they let the currency appreciate," he said.
Echoing that view, Jamie Metzl, the executive vice-president of the Asia Society, told Al Jazeera that China's announcement was "a positive step but a very preliminary step".
He said the international community needs to maintain its pressure on China over its currency and Beijing needs to be tested in the weeks and months to come to see that its actions will match its words.
Geithner's currency report, due on April 15, was put on hold until after the G20, which runs from June 26-27, to give China time to act.
Obama needs China's help on a range of other delicate issues, including sanctions against Iran and North Korea for their nuclear programmes.
But he must balance quiet diplomacy against an urgent domestic political need to be seen fighting China for US jobs before congressional elections in November.
G20 targets 'imbalances'
G20 leaders have promised to tackle so-called global macro imbalances, posed by massive trade surpluses and deficits.
Those are blamed for fostering a bubble in the US housing market in 2008, and contributing to the recent European sovereign debt crisis.
Economists say such "imbalances" are not sustainable in the long term, and warn they may trigger another damaging global financial crisis if investors take fright.
Beijing's recent insistence that the summit was the wrong place to talk about yuan flexibility could have overshadowed the meeting and China's announcement on Saturday appeared aimed at deflecting criticism.
Eswar Prasad, a former head of the International Monetary Fund's China division, called Saturday's move important "as it signals recognition by Chinese officials that a more flexible exchange rate is in China's own interest and also acknowledges its responsibility to the international community".