Market Update: dollar rises, miners drop as China hikes interest rates

A shock move by China to lift interest rates has pushed the dollar to new day highs against a basket of currencies and weighed down on metal prices and shares in mining companies.

The People's Bank of China said it would lift the rate on borrowing to 5.56% from 5.31% and on deposits to 2.5% from 2.25% tomorrow.

Copper, silver and gold futures fell 2.54%, 2.22% and 1.27% respectively after the news.

The FTSE 100 traded 29points lower at 5,712 and thee US fell more than 100 points in opening deals, falling below 11,000.

The pound sagged two cents lower against the dollar at $1.5722 and the euro dipped one cent lower at $1.3835.

Mark Williams, senior China economist at Capital Economics, said: 'The People’s Bank of China is giving a strong signal to banks to rein in lending after the surge of the last few weeks.'

But he said the move would have only a 'minimal' impact on the Chinese economy as the rates remain low given the rate of growth in China.

And he said that if - as he suspected - the rate rise was in response to the net lending data rather than fears about inflation it should not 'lead to a re-rating of the medium-term outlook' for China. 

But not everyone agrees.

Eric Viloria, senior currency strategist at forex.com warned that 'China’s demand for commodities may dampen as the central bank tightens.'

And he believes today's sell-off can be categorised as widescale move to take some risk off the table.

In the UK, mining stocks retreated as investors feared such aggressive moves by the Chinese authorities could rein in growth and therefore demand for commodities.