The yuan was also underpinned by higher stock markets. Hong Kong and China stocks jumped after rumours based on an unverified note circulating on social media that China was planning a reopening from strict COVID curbs in March.
A Chinese foreign ministry spokesman later said he was unaware of the situation.
The onshore yuan reversed earlier losses in afternoon spot trade, surging to a high of 7.2577 before finishing the domestic session at 7.2719, up 0.46% from previous late night close of 7.3050.
Earlier in the session, the People’s Bank of China (PBOC) set the midpoint rate at 7.2081 per dollar, the lowest since Jan. 24, 2008 and 0.43% weaker than the previous fix of 7.1768.
Currency traders took the breach of the key 7.2 per dollar level in the central bank fixing as a sign authorities were comfortable with further weakness.
As a result, the onshore yuan opened at 7.3201 per dollar and quickly touched 7.3280, the lowest since Dec. 26, 2007.
However, those losses were reversed in afternoon trade as the U.S. dollar sank from a one-week top against a basket of major peers, as the mood in financial markets brightened ahead of the outcome of the Federal Reserve meeting on Wednesday.
The Fed’s aggressive monetary tightening has supported the greenback and U.S. yields in recent months, and investors are now weighing the odds of a less aggressive Fed tightening.
Separately, foreign investors turned net buyers in China’s onshore yuan-denominated bond market in October, a person close to the foreign exchange regulator said, after eight straight months of outflows.