Stocks and commodities jumped on Monday and U.S. Treasuries fell after China let the yuan rise to the highest since July 2005, with more currency flexibility easing tensions with the West and encouraging investors to snap up riskier assets.
European stock futures were up as 2.2 percent and U.S. stock futures were near highs for the day, with China's shift increasing investors' confidence in the global recovery.
The yuan in the spot market climbed as high as 6.8015 against the dollar, or up 0.38 percent, its strongest level since being revalued nearly five years ago, after China's central bank signaled at the weekend that it was unshackling the currency from its 23-month-old de facto peg.
Many analysts see the currency strengthening further in coming days, albeit at a very modest pace, with greater purchasing power of the world's third-largest economy becoming a strong global investment theme.
China's commitment to allowing more yuan flexibility is definitely an encouraging factor for stability in the market, said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust Bank in Tokyo.
It is a sign that China is ready to act responsibly to fix global imbalances and avoid potential international conflicts.
Oil, metals and other commodity prices rose on hopes for strong demand from China, and currencies from economies that have a large share of exports to China -- Australia, Taiwan, South Korea, Brazil -- were expected to keep strengthening.
China's central bank said late on Saturday it was ready to make the yuan more flexible, citing a global economic recovery and more balanced external trade.
On Sunday Beijing ruled out a one-off move, saying there was no basis for any big appreciation and that it will keep the exchange rate at a basically stable level.
Nevertheless, the apparent policy change triggered a rally in riskier assets, with investors growing more confident about China's role in the economic recovery, offsetting worries about Europe's sovereign debt crisis.
MADE IN CHINA
Japan's Nikkei share average <.N225> jumped 2.4 percent to a one-month closing high, with China-linked stocks performing particularly well. Shares of Hitachi Construction <6305.T> and Komatsu <6301.T> rose 6.7 percent and 4.6 percent, respectively.
Both companies assemble and sell their products in China.
The rise in the Nikkei was welcome news after government data showed foreign investors had sold $10 billion of Japanese stocks two weeks ago, the largest weekly outflow since March 2008.
We may well be able to say that the heavy foreign selling of two weeks ago has now come to an end, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> surged 3.2 percent, led by the materials, energy and industrial sectors. The index was set for the biggest single-day gain since May 10, when global markets reacted to a $1 trillion euro zone rescue plan.
The MSCI index has already retraced more than half the losses incurred in the past two months resulting from concerns about Europe's debt crisis, though is still down 2.3 percent this year.
Hong Kong's stock market <.HSI>, the gateway to China for most global equity investors, rose 2.8 percent while the Shanghai composite index <.SSEC> gained 2.8 percent.
Chinese airline stocks were a big target, with China Southern Airlines <1055.HK> gaining 8 percent, on hopes that a stronger yuan will help reduce fuel costs.
Initial gains slipped at one point after China's central bank left the yuan's daily mid-point unchanged from Friday, but upward momentum recovered as the currency rose in the spot market.
STRONG ASIAN CURRENCIES
Emerging Asian currencies also rose sharply. Reasons for strength were two-fold: Asian reserve managers would not have to curb their own currency strength as much for competitive reasons if China lets the yuan rise, and hopes for more exports to China.
The U.S. dollar dropped 2.4 percent against the Korean won and was close to the biggest single-day decline in 13 months. The dollar was also down 1.8 percent against the Malaysian ringgit.
It's going to be a softly-softly approach in our view (for yuan appreciation). It is good for risk appetite, it is good for Asian currencies in general, said Mitul Kotecha, head of global foreign exchange strategy with Credit Agricole CIB in Hong Kong.
The euro and Australian dollar were steady on the day, having surrendered early gains after China left the daily mid-point of the yuan's exchange rate unchanged from Friday.
The euro was at $1.2450 and the Australian dollar was at US$0.8822.
U.S. Treasuries fell as cash was moved to riskier plays offering potentially higher returns. The benchmark yield on the 10-year note was up 7 basis points from late Friday in New York to 3.29 percent.
Commodities prices rallied as well on expectations that China's demand for raw materials would only increase.
Brent crude futures were up 2 percent to $79.78 a barrel and U.S. crude was up 2.1 percent to $78.83 a barrel, at the highest in six weeks.
Three-month copper on the London Metal Exchange rose 4 percent to $6,700.
U.S. soybeans and grains futures also rose.
(Additional reporting by Elaine Lies in Tokyo and Kei Okamura in Hong Kong; Editing by Jan Dahinten)