Markets give back gains

North American stock markets closed flat Monday, giving back early gains inspired by news that China has pledged to allow greater flexibility with exchange rates.

In Toronto, the S&P/TSX composite index closed up 8.49 points at 11,936.08 after trading as high as 12,018 early in the session.

New York's Dow Jones industrial average closed with a decline of 8.23 points to 10,442.41, off from a morning high of 10,594. The Nasdaq composite index moved lower by 20.71 points, or 0.9 per cent, to 2,289.09, while the S&P 500 index lost 4.31 to 1,113.2.

The Canadian dollar opened half a cent higher, starting the day at 98.42 cents US, but by its official close it had lost 0.30 cent to 97.62 cents US.

European and Asian stock markets finished higher.

London's FTSE 100 index closed higher by .92 per cent, Frankfurt's DAX was up 1.2 per cent and the Paris CAC 40 gained 1.3 per cent.

In Asia, Japan's benchmark Nikkei 225 stock index ended 2.4 per cent higher. Hong Kong's Hang Seng index climbed 3.1 per cent, while China's Shanghai composite index added 2.8 per cent.

Oil prices surged above $78 US a barrel Monday, before benchmark crude for July delivery settled up 64 cents at $77.82 US a barrel.

The announcement by the People's Bank of China that it would revert to relying on a basket of currencies that includes the U.S. dollar to determine the exchange rate, rather than the dollar alone, reflects a return to policies in force before the global financial crisis walloped Chinese manufacturers in 2008, putting millions of workers out of their jobs.

The yuan was trading up 0.42 per cent at 6.7976 to the U.S. dollar at 5:30 p.m. in Hong Kong.

Demand for oil expected to be stronger

Traders anticipate a stronger yuan will make dollar-based commodities such as oil cheaper in China and bolster demand. The policy shift also suggests China's officials believe its economy is growing enough to absorb any slowdown in exports a stronger currency may cause.

"The decision signals policymakers' confidence about China's economy and, to a lesser extent, the global recovery," Capital Economics said in a report. "This should be positive for commodities and equities both in China and the rest of the world."

But analysts said the move was mainly aimed at countering criticism of Beijing's currency policies ahead of this weekend's summit of the Group of 20 leading economies and would not result in any significant shifts in exchange rates. The yuan is still subject to a 0.5 per cent daily trading range, limiting potential volatility.

Krishen Rangasamy, an economist with CIBC World Markets, predicted a "somewhat" stronger yuan would not necessarily lead to slower Chinese and global growth.

"We suspect that revaluation, as in the 2005-2008 period, will only happen gradually, with a three to five per cent yuan appreciation per year, which would have minimal negative impacts on Chinese trade and hence employment," Rangasamy said in a commentary.