Among several factors affecting dynamic shear modulus of cohesionless soils, only two, i.e., effective stress and void ratio, were impovtant in the literature. However, this experimental study shows that, for fine-grained cohesionless soils, degree of saturation can not be overlooked. Capillary pressures between soil particles induce effective stress, consequently, increase the dynamic shear modulus. There exists an optimum degree of saturation that varies with effective grain size, at which increase in value of GO reaches its maximum. As shear strain increases, the ratio of G/G0 decreases, and the capillary effect on dynamic modulus reduces.