The People's Bank of China said in a statement it will raise the one-year yuan lending rate to 5.56% from 5.31%, and the one-year yuan deposit rate to 2.5% from 2.25%, effective Wednesday.
This is the first rate hike by the Chinese central bank in almost three years--since December 2007--and comes as the Beijing government attempts to contain inflation and soaring property prices.
The majority of the impact was felt in the foreign exchange markets, where the U.S. dollar appreciated sharply at the expense of the high-beta currencies, like the Australian, Canadian, and New Zealand dollars.
"In effect, the move by the Chinese has drawn capital out of risk and reaffirmed the recent long-dollar trend," said analysts at Brown Brothers Harriman.
By 1220 GMT, the dollar was trading at $1.3860 to the euro, compared with $1.3934 late Monday in New York, and at $0.9804 to the Australian dollar, far removed from the day's high of $0.9957.
The impact of the move was also felt in the commodity markets, as it is likely to slow down China's growth.
"The rationale behind this is that very easy Chinese monetary conditions have been one of the primary drivers for global asset demand (including commodities) and that this start to the rate-hiking cycle will tighten monetary conditions, thus reducing demand from China at the margin," noted RBC Capital Markets.
Spot gold fell around $11 to $1357 per troy ounce, while the benchmark November Nymex crude contract was $1.19 lower at $81.89 per barrel.
Equity markets turned negative on the news, with basic-resources stocks hit hard amid concerns that the higher borrowing costs might stunt Chinese demand for the related commodities.
By 1210 GMT, the Stoxx Europe 600 Basic Resources index was down 2.1%, while the more general Stoxx 600 index was 0.3% lower.
The impact was less obvious in the sovereign debt markets, as the benchmark December German bund contract edged off its lows, before drifting down in line with U.S. Treasurys.
By 1220 GMT, the December bund contract stood at 130.14, 0.42 lower.
By Peter Nurse, Dow Jones Newswires; +44-20-7842-9288; peter.nurse@dowjones.com
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