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Extra
China scraps currency's peg to the dollar
The yuan was revalued after months of political pressure, but the small change is far less than what the U.S. wanted. Are bigger changes coming, or is this just a 'gesture'?
By Kim Khan
China took what is regarded as in important first step in revaluing its currency today, shifting its peg of the yuan away from the U.S. dollar to a basket of currencies.
The move will be welcomed by countries that argue China's defense of its currency to keep it artificially weak gives the country an unfair advantage in trade. But the immediate impact on global economies is expected to be limited.
"It was going to happen at some point. They have introduced a very modest appreciation to kick the whole thing off," Ian Gunner, head of foreign exchange research at Mellon Financial Corporation, told the Associated Press.
"The market is now going to be interested in how much further there is to go. There could be another adjustment in a few months but I do not think they will want to get into a timetable here."
China uncoupled the yuan from the dollar and will let it float in a narrow band against a basket of foreign currencies (of which the U.S. dollar is likely to be one). The move revalues the yuan by 2.1% against the U.S. dollar, moving it to 8.11 yuan per dollar from 8.28.
What it means for the U.S.
The first impact in the United States was felt on Wall Street today, where analysts believe a stronger yuan will make U.S. goods more attractive.
While some expectation of a yuan revaluation was already baked into stocks, there is a "natural reaction that perhaps manufacturers will see a small bump in their earnings," John Brady, senior vice president at Man Financial, told CNBC's "Squawk Box."
In the bigger picture, however, today's move will "make zero difference to the U.S. trade deficit," Andre Bush, global market strategist at Harris Nesbitt, told CNBC's "Squawk Box."
For up-to-date market reaction, see Market Dispatches.
Other impacts:
Bonds: U.S. Treasurys sank on expectations the move could lead to less Chinese demand for U.S. bonds. To keep its currency peg, China needed to buy huge amounts of U.S. dollars and much of that was reinvested in Treasurys. The yield on the 10-year note rose 0.055% to 4.21%.
"This could change the way the Chinese do their business," market strategist Bush said. "They may stop intervening against the U.S. dollar and may stop buying Treasurys." The bond market "should be nervous" and the 10-year yield could climb as high as 4.5%, Bush said.
But while bonds will see pressure in the near term, it could be positive down the road, PIMCO Managing Director Bill Gross said.
"China has more money in their reserve pocket to purchase bond securities," Gross said. "They are basically reflating the rest of the world and the way you do that is to purchase bonds to lower interest rates."
Currencies: The yen is the big mover today, climbing 1.84% against the greenback to 110.72 yen per dollar, on anticipation of Japanese exports being more competitive compared to Chinese goods. Looking longer term, China's move to a basket will mean more demand for Asian and European currencies and less demand for the dollar. The euro climbed 0.16% against the dollar to $1.2171.
"The move is clearly positive for Asian currencies first and to some extent the euro," Emanuele Ravano, European strategist at PIMCO told Reuters. "It is pretty clear that the basket will involve a reasonable chunk of Asian currencies."
International reaction
Japan welcomed China's decision Thursday to end its currency's peg to the U.S. dollar, according to the Associated Press.
"We hope that this decision will lead to more balanced and stable economic growth for China," the Bank of Japan's international department said in a statement. "We highly value this move."
Minutes after China announced its decision on the evening news, Malaysia said it was unpegging its currency, the ringgit, from the dollar replacing it with a managed float -- a move similar to China's.
That leaves Hong Kong as the only major economy in Asia that pegs it currency to the U.S. dollar. But Morgan Stanley economist Andy Xie told Associated Press that Hong Kong is unlikely to follow suit.
"Hong Kong is an international financial center and the (US) dollar is the anchor," Xie said.
What happens next?
China, under pressure from the United States to revalue its currency, has long said it will do so -- when it is ready. Whether today's move signals more moves down the road is a subject of debate among currency traders. It falls well short of the 10% to 15% many in the U.S. had been calling for in recent months.
"It's just a gesture. The question now is whether there will be continuing speculation that China may revalue even more," Ben Kwong, an analyst from KGI Asia in Hong Kong, told Reuters.
Some language in China's official announcement indicated further adjustments could come, but did not offer a timetable. "The People's Bank of China will adjust the band of the exchange rate when appropriate, based on the maturation of the market and economic and financial circumstances," the statement read, emphasizing the "basic stability" of China's exchange rate.
There have been calls in Congress for tariffs against Chinese goods. It's unclear if today's move will be enough to quiet that discussion. On Wednesday, during a semi-annual report to Congress, Federal Reserve chairman Alan Greenspan said tariffs would not have the desired impact.
"I've said previously that I believe that it is in China's interest to allow its currency to move up, largely because its procedures that it uses to support its currency requires that their central bank accumulate very large quantities of U.S. Treasury securities," he said.
Greenspan is scheduled to continue his Capitol Hill appearance today.
MSN Money's wire services contributed to this report.
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