Summary The stronger dollar hit commodity prices, driving crude oil down after Monday's hefty gains.
LONDON (Reuters) - China s shock 2 percent devaluation of the yuan on Tuesday pushed the dollar higher and raised the prospect of a new round of currency wars, just as Greece reached a new deal to contain its debt crisis.
Stocks fell in Asia and Europe as investors worried about the implications of a move designed to support China s slowing economy and exports.
The stronger dollar hit commodity prices, driving crude oil down after Monday s hefty gains.
Weaker stocks lifted top-rated bonds, with yields on euro zone debt also falling on the Greek deal, struck nine days before Athens is due to repay 3.2 billion euros to the European Central Bank.
China s move, which the central bank described as a "one-off depreciation" based on a new way of managing the exchange rate that better reflected market forces, triggered the yuan s biggest fall since 1994, pushing it to its lowest level against the dollar CNY=CFXS in almost three years.
The Australian dollar AUD=D4, often used as a liquid proxy for the yuan, fell 1.1 percent to $0.7324 as the U.S. dollar rose 0.4 percent against a basket of currencies .DXY before paring gains.
In Asia, the Singapore dollar SGD=D3 hit a five-year low while the Malaysian ringgit MYR= and the Indonesian rupiah IDR= hit lows not seen since the Asian financial crisis 17 years ago. The Japanese yen JPY= hit a two-month low of 125.08 to the U.S. dollar.
The euro EUR=, buoyed by the Greece deal, rose 0.1 percent to $1.1022.
U.S. reaction will be crucial. Washington has for years pressed Beijing to free up the exchange rate to allow the yuan to strengthen, reflecting the growth in the world s second-largest economy.
Today, China s economy is slowing and the new exchange rate mechanism gives markets greater ability to push the yuan lower, just as the United States prepares to raise interest rates - a step that should add to dollar strength.
"It does look, however modest, like an attempt to recoup just a small amount of competitive edge lost in international markets," said Simon Derrick, head of currency research at BNY Mellon in London.
"What happens over the next few days matters. If we have a currency that moves much more freely, fine. If, however, we go back and it s just repegged ... that is currency war."
European shares fell. The pan-European FTSEurofirst 300 index .FTEU3 was down 1 percent, led lower by car makers and luxury goods companies, whose products have just got more expensive for Chinese consumers. Shares in Athens .ATG rose 1.9 percent, however, making it the only European bourse to rise.
This followed falls in Asia. MSCI s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gave up early gains and was down 1.4 percent at its lowest since February 2014. Japan s Nikkei .N225 slipped 0.4 percent.
On Chinese stock markets, airlines and importers fell, though exporters rose. The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen lost 0.4 percent and the Shanghai Composite .SSEC closed flat.
BONDS
The weakness in stocks boosted top-rated bonds. German 10-year yields DE10YT=TWEB fell 5 basis points to 0.65 percent and U.S. equivalents US10T=RR dropped more than 8 bps to 2.16 percent.
The deal on a third bailout for Greece also helped yields on lower-rated Spanish and Italian bonds drop 6 bps apiece while Greek two-year yields GR2YT=TWEB fell 4.7 percentage points to 14.74 percent, their lowest since March.
"The Chinese devaluation was taken as things are not going that well in China and this is a risk-off move," said Martin van Vliet, senior rate strategist at ING, adding that "with the Greek deal secured and the ECB continuously buying bonds, peripheral spreads would have been much tighter (but for China)".
Oil prices fell as dollar-priced commodities became more expensive, weighing on demand. Brent crude LCOc1 was down 59 cents a barrel at $49.79.
Gold XAU= fell as low as $1,093.25 before recovering to around $1,1109 an ounce as investors sought safety.
"Probably gold is benefiting from fears that this is a new round of currency war ," Macquarie analyst Matthew Turner said, adding that the move had increased uncertainties about the global economy, which tends to be good for gold.
