Stocks up as yuan move triggers risk rally

Author: 
Natsuko Waki | Reuters
Publication Date: 
Mon, 2010-06-21 13:54

Spot yuan climbed to its highest level against the dollar since its last revaluation in July 2005, after China announced on Sunday it would end a 23-month dollar peg.
Coming just days before a Group of 20 summit in Toronto, China's move for a more flexible yuan would also boost purchasing power and demand in the world's third largest economy, encouraging investors globally to buy risky assets.
A higher yuan would also help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively.
"It is a relief the Chinese has made some move," said Justin Urquhart Stewart, director at Seven Investment Management.
"It is positive to the market as it had been an issue the US had been flagging up in regard to global trade." MSCI world equity index rose 1.2 percent, hitting its highest level since mid-May.
The FTSEurofirst 300 index was up 1.4 percent, rising for the ninth straight session to hit a 5-1/2 week peak.
Emerging stocks rose 2.5 percent to a six-week high while emerging sovereign debt spreads tightened 8 basis points to 302 bps, their narrowest in five weeks.
"The move appears to reflect increased confidence that the Chinese and world economies are growing in a stable and sustainable fashion," UBS said in a note to clients.
"Almost certainly, China's leadership would not have taken this step unless they were confident about economic and financial stability."
US crude oil rose 1.8 percent to $78.56 a barrel while spot gold hit a record high of $1,262.75 an ounce, helped by the fall in the dollar, which lost around 0.5 percent against a basket of currencies.
The euro rose to a one-month high near $1.2490 before stabilising at $1.2432, steady on the day.
Breaking the peg might mean China needs to buy less US dollars in intervention, which would leave it with fewer dollars to buy US Treasuries, but also less need to diversify its holdings into currencies like the euro.
Bund futures fell 23 ticks as improving risk appetite reduced demand for safe-haven government bonds.

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