The US dollar lurched higher on Tuesday as China allowed its yuan to fall to levels last seen in 2012, a shift that could provide a competitive boost to exports for the world’s second-largest economy.
Asian stocks turned mixed as investors weighed the implications of the surprise move, which seemed to end months of officially sanctioned yuan strength.
China’s central bank set the midpoint for its currency at 6.2298 per dollar, down from Monday’s fix of 6.1162, and said it was aiming for a depreciation of 2 per cent.
Markets reacted by selling the Australian dollar, often used as a liquid proxy for the Chinese currency. The Aussie sank to $0.7314, compared with $0.7430 ahead of the news.
Other currencies in the region also lost ground to the US dollar as investors reasoned they would need to fall to keep exports competitive with China.
“As this event has boosted the US dollar and dampened local currencies, it is likely to be welcomed by regional central banks,’’ said Annette Beacher, chief Asia-Pacific macro strategist at TD Securities.
“Any policies that boost the outlook for Chinese growth are positive for the growth outlook more broadly.’’
Against a basket of currencies, the US dollar gained 0.4 per cent to 97.506. The euro eased to $1.0977, while the dollar firmed to 124.75 yen.
Asian shares
Chinese share markets were choppy on the news and eventually turned lower. The CSI300 index was down 0.7 per cent, while Shanghai stocks slipped 0.6 per cent after scoring hefty gains on Monday.
Elsewhere in the region, MSCI’s broadest index of Asia-Pacific shares outside Japan lost early gains and was down 0.2 per cent. Japan’s Nikkei slipped 0.2 per cent.
Sovereign bond markets seemed to catch a bid from the bout of market volatility and yields on 10-year US Treasuries dipped 3 basis points to 2.196 per cent.
US stocks
Sentiment had initially got a lift from a bounce on Wall Street. The Dow had ended on Monday with gains of 1.39 per cent, while the S&P 500 climbed 1.28 per cent and the Nasdaq 1.16 per cent.
Shares in Google jumped more than 5 per cent, adding $25 billion to its market value, after announcing a new holding company called Alphabet which will separate the core web advertising business from newer ventures.
In commodity markets, the shift in Beijing’s currency policy could be seen as a negative in the very near term as a lower yuan makes resources more expensive to Chinese buyers.
Three-month copper futures were off 0.7 per cent, although that followed a sharp rally on Monday.
Oil also eased back from Monday’s highs. Brent crude was quoted 41 cents lower at $50.00 a barrel, while US crude eased 44 cents to $44.53.