European stock markets fell in response to China's move, although with the UK on holiday until Wednesday, trading activity was limited even more.
Stocks and commodities, while weak on Monday, hovered just underneath better than two year highs.
China's rate increase on Dec. 25 is the second in just over two months and represents the central bank's stepped up efforts to slow the pace of rising inflation.
The euro rose to its best levels in a week against the greenback, although oil prices pulled back from 26-month highs in light of China's rate move which countered the influence of severe cold weather in the United States and Europe.
Tighter Chinese monetary policy, which theoretically would slow the pace of economic growth, is being felt far and wide given the nation's growing influence in commodity markets as well as development in emerging markets.
It also fills a void left by struggling developed markets whose sub-trend economic growth is expected to linger due to the ongoing debt crisis.
"In the long run, this is going to be healthy for the Chinese economy, but the instinctive market reaction is that this is going to be bad for global demand, giving investors a reason to sell off equities," said Quincy Krosby, market strategist with Prudential Financial in Newark, New Jersey.
In mid-morning New York trade, the Dow Jones Industrial Average fell 28.91 points, or 0.25 percent, to 11,544.58. The Standard & Poor's 500 Index lost 2.42 points, or 0.19 percent, to 1,254.35. The Nasdaq Composite Index dropped 14.38 points, or 0.54 percent, to 2,651.22.
In Europe, the FTSEurofirst 300 ended 0.8 percent lower at 1,137.80.
Chinese shares traded in Shanghai fell 1.9 percent, although elsewhere in Asia, markets bucked the downward trend.
The MSCI index of Asian stocks outside Japan rose 0.02 percent with Japan's Nikkei closing up 0.75 percent, extending its recent outperformance in Asia.
The MSCI All Country World index dipped 0.2 percent while the Thomson Reuters global stock index lost 0.27 percent.
China's central bank said on Saturday it would raise the benchmark lending rate by 25 basis points to 5.81 percent and lift the benchmark deposit rate by 25 basis points to 2.75 percent.
On Monday the PBOC took aim at inflation once again by saying prudent monetary policy would be helpful in combating price pressures and asset bubbles.
The normally thin post-holiday market was made even more so by a severe blizzard that shut down some commuter transport networks, making New York trading desks operate on skeletal staffing.
The euro rose after shaking off losses below its 200-day moving average — $1.3087, according to Reuters data.
A move below that level is usually indicative of more losses. While fears that a euro zone debt crisis could spread have pushed the euro below the 200-day moving average in five of the last six sessions, it has rebounded swiftly each time. It was last up 0.30 percent at $1.3154.
"With no economic news, we're focusing on these technical factors, and that push above the 200-day average has been a catalyst for the euro," said Omer Esiner, strategist at Commonwealth Foreign Exchange in Washington. "And with London off and the blizzard in New York, things are very subdued."
The dollar traded flat against the yen at 82.85, after dropping to a three week low in Asian trading hours.
The Australian dollar fell as low as $0.9987, though it had clawed back to $1.0025, nearly flat on the day. The currency hit a six-week high of $1.0067 last week.
US light sweet crude oil fell 49 cents, or 0.54 percent, to $91.02 per barrel, and spot gold prices fell $1.95, or 0.14 percent, to $1382.30.
