LONDON -- World stock markets rallied Monday on China's decision to allow its currency to appreciate against the dollar, a move that will allow it to keep interest rates low and will help rebalance growth in the world economy.

The loosening of the yuan's two-year-old peg to the dollar caused the dollar to slump to 6.8016 yuan from 6.8272 yuan on Friday, though a limit on the daily trading range is expected to prevent much larger movements.

The announcement also helped the euro, pushing it to $1.2457 from $1.2364.

Among stocks, Britain's FTSE 100 rose 1% to 5,304.97 and Germany's DAX was 1.4% higher at 6,302.45. France's CAC-40 gained 1.5% to 3,740.77.

After sharp gains in Asia, Wall Street was also expected to jump on the open.

Beijing's announcement on Saturday affects markets because China currently keeps the yuan artificially low to boost exports. That helps China sells products to the U.S. and Europe on the cheap, but also makes it difficult for its own consumers to buy foreign goods.

An appreciation in the yuan would help balance out growth across China's economy and is considered a boost for U.S. and European manufacturers and exporters. The main market impact -- a weakening of the dollar -- could also help make the U.S. economy more competitive.

Finally, by letting the currency rise, the threat of inflation to China should be reduced, easing investors' worries that interest rates could be hiked to cool off the economy.

"Market players saw the announcement as a sign that Chinese authorities are confident in China's economic growth," said Kazuhiro Takahashi, equity strategist at Daiwa SMBC Securities.

However, experts also noted that any reform to China's currency policy would be gradual.

"Stability appears to be the name of the game," said Mitul Kotecha, currency analyst at Credit Agricole.

Meanwhile, investors will continue to gauge developments in Europe's debt crisis. Markets were buoyed last week after Spain saw strong demand for a bond sale, the Greece was said to exceed its budget-cutting targets and the EU agreed to publish bank stress test results.

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