The rally in global markets over China’s decision to let its currency rise gradually appears to have faded after just one day.
Investors reassessed the impact of China’s plan for more currency flexibility and grew skeptical about how much Beijing would allow the yuan to rise.
“People gave much more weight to the currency move than it deserved,” said Koen De Leus, economist at KBC Securities.
China’s move on the yuan had set off optimism that a stronger yuan would lift its purchasing power for foreign goods such as commodities, a boon to the global economy given the nation’s vast appetite for raw materials. (Track the yuan here).
But that euphoria was checked as investors took a more considered view on the impact the move would have on economic fundamentals.
The Chinese yuan slipped on Tuesday as big state-owned banks heavily bought dollars, a move that suggests the central bank has adopted a new strategy to control the pace of yuan gains.
“A great deal of uncertainty remains relating to the peg of the yuan,” said Thomas di Galoma, head of fixed-income rates trading at Guggenheim Securities in New York.
The US dollar rose against the euro and commodity stocks weakened. US crude oil futures edged lower in choppy trading, curbed by a stronger greenback and lowered expectations about a demand boost in China brought by its move toward currency flexibility.
US Treasury prices also rose as financial markets realized China’s vow to make the yuan currency more flexible would evolve only gradually, turning sentiment in favor of safe-haven US government debt.
European shares ended a near two-week winning run, led lower by banks after Fitch Ratings’ downgrade of BNP Paribas revived concerns over the health of the banking sector.
Asian stocks retreated as investors booked profits from Monday’s rally.
Despite the brief rally, some market pros see long-term implications from China’s decision.
Jing Ulrich, chair of China equities and commodities at JPMorgan, told CNBC that the move will have a lasting and positive impact on the China’s overall economy.
“This is going to lead to a transition from export-lead, investment-lead to more of a consumption-lead economy going forward,” Ulrich said. “I think the ramifications are profound not just for the next few months but actually for the coming years.”
-Reuters contributed most of the reporting for this story.