Asian stocks and commodities retreated today as wary investors took profits from a rally ignited by China's weekend decision to give its currency more flexibility.
European shares were expected to follow Asian and US stock markets into the red, with Britain's FTSE 100 , Germany's DAX, and France's CAC-40 seen opening as much as 1 per cent lower.
In addition to concerns about China, financial markets turned cautious ahead of Britain's budget later in the day, which is expected to contain massive spending cuts and tax rises as worries about sovereign debt levels spread throughout Europe.
China's currency reforms initially sparked a global rally in riskier assets on Monday on hopes that a stronger yuan would boost its already formidable purchasing power for imported goods and raw materials, giving the global economic recovery a much-needed shot in the arm.
But that euphoria quickly vanished as investors took a more considered view of the impact the move would have on China's actual near-term demand and grew sceptical about how much Beijing would allow the yuan to rise.
Big Chinese state-owned banks kept the yuan in check today, a day after its biggest rise since the currency was revalued in 2005, indicating Beijing will allow the currency to appreciate at a far slower pace than demanded by its critics in the West.
Japan's Nikkei slipped 1.2 per cent as foreign investors turned sellers after the benchmark powered to a one-month closing high in the previous session.
The MSCI index of Asia Pacific ex-Japan stocks fell 1 per cent. Yesterday the index had bolted 3.2 per cent to a five-week high as China allowed the yuan to rise.
China's central bank set the yuan's daily mid-point at 6.7980 against the dollar today, the highest level since the yuan's revaluation in July 2005, signalling it could allow the yuan to rise further.
But the move gave markets only a brief respite from early selling pressure as the spot rate soon fell. The yuan rose to as high as 6.7900 in early trade, up 0.11 per cent yesterday, when it jumped nearly 0.5 per cent. But by afternoon it had slipped 0.35 per cent.
Reuters