IMF chief Christine Lagarde described China's move on the yuan as an "important step"
The US and the IMF welcomed China's decision to widen the trading band on the nation's currency, while analysts downplayed the likelihood of wide swings in the value of the yuan.
The People's Bank of China, China's central bank, announced Saturday that it will allow the yuan to fluctuate by up to 1.0 percent on either side of its trading band when markets open Monday.
The yuan is currently allowed to trade 0.5 percent on either side of a midpoint price set by the central bank every trading day.
The new rules came as pressures for the yuan to appreciate have eased substantially after recent data showed the country's trade has become more balanced, analysts said.
The decision also followed data released Friday showing the world's second-largest economy grew at its slowest pace in three years during the first quarter, a development that calls for further policy easing.
IMF chief Christine Lagarde described the move on the yuan as an "important step".
"This underlines China's commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate," Lagarde said in a statement.
Beijing's trading partners have long criticised its yuan exchange rate, saying it is kept artificially low, fuelling a flow of cheap exports that have helped trigger huge trade deficits between some countries and China.
The White House Saturday reacted cautiously to the announcement, saying it would like to see "more movement."
"They've made some progress, we'd like to see more movement. We noted this announcement. We're reviewing it closely," a top administration advisor, Ben Rhodes, told reporters on the sidelines of a regional summit in Colombia.
"It comes in the continuum of us wanting to see the Chinese take more of these steps to see their currency appreciate to come in line with the market value," added Rhodes, the deputy national security advisor.
Chinese Prime Minister Wen Jiabao acknowledged last month that the yuan had increased in value by some 30 percent since 2005 in comparison to the dollar.
The move to loosen the currency's trading band could engender two-way volatility in the exchange rate, Bank of America-Merrill Lynch economist Lu Ting told Dow Jones Newswires.
"China will avoid significant appreciation or depreciation this year due to uncertain global environment and the need for stability during the year of leadership change," Lu said of political transitions in China and the US.
Lu said his bank expects the dollar-yuan exchange rate to be at 6.2000 at the end of this year.
China's economy grew at a lower-than-expected 8.1 percent in the first quarter, compared with 8.9 percent in the fourth quarter of 2011.
Its trade surplus has also been shrinking in recent months, China recorded a $5.35 billion trade surplus in March, reversing a $31.48 billion deficit in February.
"It's a good time to increase the flexibility of the exchange rate (as) there hasn't been a lot of speculative inflows due to expectations of an appreciation in the yuan," Wang Tao, an economist at UBS, told Dow Jones Newswires.