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 Stocks fell in Asia and Europe as investors worried about the
implications of a move designed to support China's slowing economy
and exports.
The stronger dollar hit commodity prices, driving crude oil down
after Monday's hefty gains.
Weaker stocks lifted top-rated bonds, with yields on euro zone debt
also falling on the Greek deal, struck nine days before Athens is
due to repay 3.2 billion euros to the European Central Bank.
China's move, which the central bank described as a "one-off
depreciation" based on a new way of managing the exchange rate that
better reflected market forces, triggered the yuan's biggest fall
since 1994, pushing it to its lowest level against the dollar in
almost three years.
The Australian dollar, often used as a liquid proxy for the yuan,
fell 1.1 percent to $0.7324 as the U.S. dollar rose 0.4 percent
against a basket of currencies <.DXY> before paring gains.
In Asia, the Singapore dollar hit a five-year low while the
Malaysian ringgit and the Indonesian rupiah hit lows not seen since
the Asian financial crisis 17 years ago. The Japanese yen <JPY=> hit
a two-month low of 125.08 to the U.S. dollar.
The euro, buoyed by the Greece deal, rose 0.1 percent to $1.1022.
U.S. reaction will be crucial. Washington has for years pressed
Beijing to free up the exchange rate to allow the yuan to
strengthen, reflecting the growth in the world's second-largest
economy.
Today, China's economy is slowing and the new exchange rate
mechanism gives markets greater ability to push the yuan lower, just
as the United States prepares to raise interest rates - a step that
should add to dollar strength.
"It does look, however modest, like an attempt to recoup just a
small amount of competitive edge lost in international markets,"
said Simon Derrick, head of currency research at BNY Mellon in
London.
"What happens over the next few days matters. If we have a currency
that moves much more freely, fine. If, however, we go back and it's
just repegged ... that is currency war."
European shares fell. The pan-European FTSEurofirst 300 index was
down 1 percent, led lower by car makers and luxury goods companies,
whose products have just got more expensive for Chinese consumers.
Shares in Athens <.ATG> rose 1.9 percent, however, making it the
only European bourse to rise.
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This followed falls in Asia. MSCI's broadest index of Asia-Pacific
shares outside Japan gave up early gains and was down 1.4 percent at
its lowest since February 2014. Japan's Nikkei slipped 0.4 percent.
On Chinese stock markets, airlines and importers fell, though
exporters rose. The CSI300 index of the largest listed companies in
Shanghai and Shenzhen lost 0.4 percent and the Shanghai Composite
closed flat.
BONDS
The weakness in stocks boosted top-rated bonds. German 10-year
yields fell 5 basis points to 0.65 percent and U.S. equivalents
dropped more than 8 bps to 2.16 percent.
The deal on a third bailout for Greece also helped yields on
lower-rated Spanish and Italian bonds drop 6 bps apiece while Greek
two-year yields fell 4.7 percentage points to 14.74 percent, their
lowest since March.
"The Chinese devaluation was taken as 'things are not going that
well in China' and this is a risk-off move," said Martin van Vliet,
senior rate strategist at ING, adding that "with the Greek deal
secured and the ECB continuously buying bonds, peripheral spreads
would have been much tighter (but for China)".
Oil prices fell as dollar-priced commodities became more expensive,
weighing on demand. Brent crude was down 59 cents a barrel at
$49.79.
Gold fell as low as $1,093.25 before recovering to around $1,1109 an
ounce as investors sought safety.
"Probably gold is benefiting from fears that this is a new round of
'currency war'," Macquarie analyst Matthew Turner said, adding that
the move had increased uncertainties about the global economy, which
tends to be good for gold.
(Editing by Ruth Pitchford and Kevin Liffey)
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