China's yuan bolted to a 21-month high on Monday, suggesting authorities are unshackling the currency from its de facto 23-month-old peg to the dollar after vowing greater flexibility at the weekend.
Asian currencies and stocks rose and U.S. Treasuries fell on expectations that China's promise to give the currency new room to move would ease political tensions with the West and encourage investors to snap up riskier assets.
China's decision to keep the currency pegged to the U.S. dollar since the middle of 2008 has been a lightning rod for criticism that Beijing has been gaining an unfair trade advantage during the global downturn.
It's announcement at the weekend that it would give the currency greater flexibility was welcomed globally, including by the United States, albeit with some caution as policymakers waited to see what the words would mean in practice.
The first part of the answer came on Monday.
The yuan rose as high as 6.8110 per dollar, up just 0.2 percent from its close on Friday of 6.8262, but still the highest level since September 2008.
It was also the biggest intraday rise since October 2008, further evidence that the central bank was allowing the currency some room to move more freely.
The central bank sets a daily reference point each day for yuan trade. The currency is allowed to move 0.5 percent either side of the reference point.
The central bank earlier set the reference point at 6.8275 per dollar, unchanged from its reference point on Friday, prompting some doubts about China's intentions and a slight cooling in the rally in other markets.
In the short term, the PBOC needs to let the yuan rise to appease the United States and rising pressures there, said Wang Haoyu, economist with First Capital Securities in Shenzhen.
But maybe they didn't move the mid-point to send the message that, 'Yes we will move, but the move will be slow.'
Many economists see the currency strengthening further in coming days, albeit at a very modest pace.
It's a multi-month trade, said Endre Pedersen, a fund manager at MFC Global Investment Management in Hong Hong.
Over the next few weeks, we would expect the currency to start making some ground against the dollar. But we are not going to trade anything on one number like that, he said.
Assets leveraged to global growth, from commodities to stocks and Asian currencies, all rose on hopes that China's surprise pledge of yuan flexibility would lessen the risk of a trade war between the world's biggest and third-largest economies.
It's a relief rally in the sense that this could ease trade tensions into the Group of 20 meeting, said Sean Callow, senior currency strategist at Westpac in Sydney, before China set the reference point.
Perhaps the excitement has been overdone as this is just a small step on a very long march, he added. But you have to assume the yuan will rise this week given all the political angst. They need to turn up at the G20 with something real.
Beijing has faced a barrage of complaints from abroad for keeping the yuan artificially cheap even as the country's export juggernaut roared back to life.
The People's Bank of China had surprised everyone on Saturday by saying it would make the yuan more flexible, but it also played down the chances of major change.
In a separate statement on Sunday on its website, the central bank explicitly ruled out a one-off revaluation, repeating that there was no basis for any big appreciation and that the currency's value was not far off its fair level.
Still, investors welcomed any sign that Beijing was ready to break a 23-month-old peg to the dollar.
As well as a nod to trade tensions, a rising yuan would give China more purchasing power to buy foreign goods, which would be positive for world trade, especially for commodity exporters such as Australia, Brazil, Canada and New Zealand.
In early trading, the Australian dollar jumped a full cent on Monday to more than $0.8800.
Most Asian currencies climbed, several by more than 1 percent.
Asia's export-focused countries have been loathe to let their currencies appreciate too much and lose competitiveness while the yuan was pegged to the dollar.
The U.S. dollar fell broadly and commodities from oil to base metals all rose in early dealings, although they lost some allure after the yuan reference point was set.
U.S. S&P 500 stock futures rose 1.3 percent and Japan's Nikkei 225 rallied more than 2 percent.
Economists also hope a higher yuan could help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively. Markets had been worried that China could over-tighten and suffer a hard landing.
That could make any move by Beijing more palatable to a domestic audience that sees any concessions on the yuan as kow-towing to the United States.
A few websites in China made their views heard.
This is such worrying news! China, you have surrendered! wrote one online reader of the Global Times, a popular tabloid.
We're so well-behaved, doing whatever the United States asks of us, wondered another, sarcastically.
(Additional writing by Wayne Cole; Additional reporting by Koh Gui Qing, Edmund Klamann, Karen Yeung, Simon Rabinovitch, Pedro da Costa and Ben Blanchard; Editing by Mark Bendeich and Neil Fullick)