A day after China announced it was revaluing its currency and abandoning its peg to the U.S. dollar, global markets scaled back early expectations that the policy shift would produce major changes in the value of the Chinese yuan.
Traders initially bid up the value of the yen, for example, on the theory that a stronger Chinese currency would ease competitive pressures on Japanese exporters. But yesterday, in the first day of trading, the yuan stayed close to the 8.11 level, weakening slightly to 8.111. That suggested that the government would keep a tight rein on the national currency.
"The big shock to the markets came [Thursday]. The yen rallied considerably against the dollar," said Ronald D. Simpson, managing director of global currency analysis at Action Economics LLC in New York. "A third of those gains were given up [yesterday] as the markets took a step back and looked at what actually happened."
China's central bank said Thursday it would abandon its decade-long policy of fixing the yuan to 8.28 per U.S. dollar. The authorities said the value of the yuan would rise immediately by 2.1 percent, to 8.11 yuan per dollar. Even more significant, China also said it would allow the yuan to fluctuate within 0.3 percent of the previous day's close.
Revaluation of the yuan pleased the White House and U.S. legislators, who have long complained that China's currency peg to the dollar kept the yuan artificially cheap and gave Chinese exporters an unfair competitive advantage.
It is still too early to tell if the yuan will remain at 8.11, said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. "The significant point of what happened [yesterday] is that it had every look and feel of being a pegged currency, but at a new level."
Accordingly, global markets reversed some of the moves that were fueled by China's announcement on Thursday. The yen, which strengthened Thursday from 112.28 to below 110 per dollar during trading, retreated to 111.33 as of 5 p.m. yesterday.
China's announcement had also spurred heavy selling of Treasury bonds on Thursday. But prices rebounded yesterday and the yield on the 10-year Treasury note declined to 4.22 percent from a previous close of 4.28 percent.
Analysts said market reaction to China's new currency system will be minimal until more details emerge about the policy. Chinese officials have said they will link the yuan to a basket of foreign currencies, but they have yet to identify those currencies or how much weight each will carry.
"Until the market gets a concrete list of how the currency basket is going to be comprised and what percentage will be U.S. currency-based, Asian currency-based, and European currency-based, the biggest impact is behind us now," Simpson said.
In oil markets, the new currency policy makes oil cheaper for China because it is priced in U.S. dollars. But the 2 percent revaluation alone is too small to significantly increase demand, said Fareed Mohamedi, chief economist of PFC Energy in Washington.
"If it's a steady revaluation and goes up 10 to 15 percent, then it could become material," he said.
Yesterday, the Halter USX China Index, comprising 49 companies that are traded in U.S. markets and that conduct significant business in China, declined 0.65 percent. The index had increased 3.53 percent on Thursday after China's announcement.
The short-term impact on the markets has been "pretty trivial," William C. Dudley, chief U.S. economist at Goldman, Sachs and Co. in New York, wrote in a research note.