So what happens?. Well, in the vein of pure Newtonian physics, for every action there is a reaction, and the markets reacted badly across the world. To name a few effects:
- Stock markets get slammed across the world, with the U.S. market falling 1.5%;
- Oil drops by 4%, or the largest decline in 8 months;
- Gold falls by 2.6%;
- Brazil announces its second tax on foreign investment in an effort to try to reduce the appreciation of its currency;
- Japan and Canada, among other nations, express concerns about the currency markets. The Japanese central bank again publicly worries about the strength of the yen.
One of the most interesting points about yesterday's move in China was the fact that only recently Chinese officials had said that they did not see the need to change interest rate policy. In my opinion, the Chinese continue to want to send the message that they do not have to follow the lead of any other countries in determining domestic economic policies (especially the U.S.).
Here's an excerpt from today's Wall Street Journal:
Investors were split on the impact China's move will have on currency diplomacy. Tensions have been building as a result of the money flooding into emerging markets, driving up the currencies of countries such as Brazil and South Korea against the dollar.
Because China effectively pegs the yuan to the dollar, exporters in those countries have been losing competitiveness against China, their chief rival in the global markets. In response, many governments have been pushing back against the tide of money boosting their currencies.Those issues were front and center Tuesday.
Brazil raised the tax on foreign investment in Brazilian bonds. And in Seoul, the South Korean finance minister said the government was considering reinstating a withholding tax on foreign investors' holdings in some Korean securities.
China Raises Interest Rates - WSJ.com