Chinese currency appreciated to its highest level in more than three months as the US dollar index weakened on the first trading day of 2018, indicating the market's expectation of stable economic growth and confidence in financing deleveraging efforts.

The daily trading reference of the yuan's exchange rate against the US dollar rose to 6.5079 on Tuesday, compared with 6.5342 on Friday, the strongest since Sept 11 last year, according to data from the China Foreign Exchange Trade System (CFETS).

The onshore spot rate once hit 6.5062 before the closing while in the offshore market it reached a peak of 6.5231.

Sheng Songcheng, an adviser to the People's Bank of China, the central bank, said that the rise of the yuan's value is mainly because of a relatively higher interest rate level in the Chinese financial market as the deleveraging process is advancing.

"A seasonal tightening of market liquidity also boosted demand for the yuan, and the authority's decision to (maintain) prudent monetary policy means monetary easing is unlikely in the near term," Sheng said.

Due to the weakening of the US dollar index, the yuan appreciated 6.28 percent in 2017, according to the CFETS data.

Economists said the prospect of a stable Chinese economy this year can avoid turbulence in the foreign exchange market.

State Administration of Foreign Exchange (SAFE), the country's foreign exchange regulator, announced on Saturday that since the beginning of this year, a single, individual Chinese citizen can withdraw as much as 100,000 yuan overseas per year. Before that, the same amount of annual limit was mandated merely for a single bank card.

The new limit can satisfy card users' normal demand on cash withdrawal overseas while still curbing illegal and large withdrawals that may be related to money laundering and terrorist financing, according to the statement published on SAFE's website.

Experts said that the new rule can to some extent restrain capital outflows, and support a stable currency value.

However, signals showed that the appreciation may not last long, as banks purchased more foreign exchanges than the total sell in November, which resulted into a deficit of $7.52 billion, the largest deficit since August.

A "two-way" fluctuation of the yuan's exchange rate may continue in the coming months, according to analysts.

Zhao Yang, chief economist in China with Nomura Securities, said on Tuesday that "deleveraging efforts that are handled well and do not lead to financial stress would be positive for the yuan over the medium term".

But he also mentioned possible depreciation risks in the near term if the financial stress increases and capital outflows surges.

"Combined with reports showing strength in Chinese and European manufacturing, there is probably more pain ahead for the dollar as investors anticipate money flowing into other economies," Mark McCormick at Toronto Dominion Bank was quoted as saying by Bloomberg.

He expects the dollar weakness to persist through 2018 as more central banks move toward policy normalization.

Options are signaling that traders have started to prep for the possibility of greenback losses. The dollar's one-and six-month risk reversals against the euro, a barometer of positioning and investor sentiment, both rose to the highest in a month in anticipation of a weaker dollar.

Bloomberg contributed to this story.

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