China said on Saturday it would gradually make the yuan's exchange rate more flexible, indicating it was ready to break a 23-month-old U.S. dollar peg that had come under intense fire from abroad. For stories on China's currency, see [ID:nSGE65I02M]

Investors were now waiting to see where Chinese authorities would actually set the yuan's mid-point against the U.S. dollar later on Monday and to see how flexible the yuan becomes.

China's central bank set the yuan's daily mid-point CNY=SAEC at 6.8275 against the dollar on Friday.

The dollar recovered some of its earlier losses against the Australian dollar, euro and yen, as speculators cut short positions on the expectation that the yuan's appreciation against the dollar would be a gradual one.

"We expect to see a visible move in the CNY/USD rate, but constrained by the 0.5 percent trading band," said Scott Haslem, chief economist at UBS in Sydney.

The Aussie AUD=D4 climbed more than 1 percent to a one-month high of $0.8830, before steadying around $0.8810, up from $0.8703 late in New York on Friday.

The New Zealand dollar NZD=D4 also powered as much as 1.2 percent higher to a five-week high of $0.7140, before steadying around $0.7120, up 0.9 percent on the day.

The euro EUR= was trading up 0.4 percent at $1.2434, after being quoted as high as $1.2487. One trader said the euro did change hands for as much as $1.2490.

The yen eased 0.2 percent to 90.48 JPY=, but off earlier low of 90.01 on trading platform EBS.

Most Asian currencies also gained, with the U.S. dollar dropping just over 1 percent against the Singapore dollar to a five-week low of 1.3697 SGD=.

Westpac senior currency strategist Imre Speizer said for a variety of reasons the yuan statement was seen as positive for commodity currencies such as the Australian and New Zealand dollars, including the prospect of improved exports to China.
 
"This move may also have been designed to reduce friction at the G-20 meeting involving trade issues," Speizer said.

The yuan's value had been seen as a potential point of conflict at the Group of 20 summit in Toronto on June 26-27, as Washington pressed for moves to a market-based exchange rate, while Beijing had said the currency was its own business and outsiders should not meddle.

"Only a visible appreciation against the US dollar can quell international pressures and threat of trade protectionism," said Scott Haslem at UBS in Sydney.

"However, we do not expect significant appreciation against the USD in the time ahead, particularly since the euro has weakened substantially."

He saw the dollar reaching 6.55 yuan by year end, with this appreciation of between 3 and 4 percent likely achieved in the next few weeks.

A more flexible yuan would lessen the threat of a Sino-U.S. trade war, which could have been a danger to global growth, and enable China to buy more commodities, or at least cope better with higher commodity prices, a positive for big resource exporters like Australia and New Zealand.

A higher yuan would also help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively.

Markets have been worried China could over-tighten and slow its economy too far.

Breaking the peg might mean China needs to buy less U.S. dollars in intervention, which would leave it with fewer dollars to buy U.S. Treasuries, but also less need to diversify its holdings into currencies like the euro. (Additional reporting by Gyles Beckford in Wellington; Editing by Edwina Gibbs