Guedes is Wolves' second summer signing following the arrival of Nathan Collins from Burnley earlier in the transfer window.
The 25-year-old initially joined Valencia from Paris Saint Germain on loan in the summer of 2017 before making the move permanent the following season.
He made 178 appearances in total for Los Che, scoring 38 goals and will be reuniting with Wolves boss Bruno Lage, whom he worked with at Benfica earlier in his career.
Speaking after the deal was completed, Wolves chairman Jeff Shi said: "We have been monitoring Goncalo for a long time and are very pleased to welcome him to Wolves.
"He has natural talent and has performed very well across Europe and for his country, and we think he is well suited to the Premier League.
"We are always looking to improve the squad with high quality, and have been patient to make sure we got the right player.
"Goncalo worked with Bruno (Lage) at Benfica and played with many members of our squad previously, so we’re confident he will settle quickly into the group here."
Guedes could make his debut for his new club this weekend when Wolves host Fulham at Molineux.
Wolves lost 2-1 in their opening game of the season against Leeds United.
Guedes has won 32 caps for Portugal, scoring seven goals, including the winner in the 2019 UEFA Nations League final against Netherlands.
