Stocks and commodities jumped on Monday and U.S. Treasuries fell as investors bet China will allow the yuan to rise after promising more currency flexibility, easing political tensions with the West and encouraging investors to snap up riskier assets.

The spot yuan rate edged up to 6.8110 against the dollar, its strongest level since September 2008, after China's central bank signaled at the weekend that it was unshackling the currency from its de facto 23-month-old peg.

Many analysts see the currency strengthening further in coming days, albeit at a very modest pace, with greater purchasing power of the world's third-largest economy becoming a strong global investment theme.

This provides a positive psychological boost to Asian financial markets, so not just Asian equity markets but also Asian currencies and bond markets as well, Khiem Do, head of Asian multi asset at Baring Asset Management in Hong Kong, told Reuters Insider television.

Do's exposure to China was domestically focused, with bets on property and infrastructure stocks. He also was bullish on Chinese companies with U.S. dollar-denominated debt.

Oil, metals and other commodity prices rose on hopes China's increased purchasing power will boost demand, and currencies from economies that have a large share of exports to China -- Australia, Taiwan, South Korea, Brazil -- were expected to keep strengthening.

China's central bank said late on Saturday it was ready to make the yuan more flexible, citing a global economic recovery and more balanced external trade.

On Sunday Beijing ruled out a one-off move, saying there was no basis for any big appreciation and that it will keep the exchange rate at a basically stable level.

Nevertheless, the apparent policy change triggered a rally in riskier assets, with investors growing more confident about China's key role in the global economic recovery, offsetting worries about Europe's festering sovereign debt crisis.

Japan's Nikkei share average <.N225> jumped 2.4 percent to a one-month high, with China-linked stocks performing particularly well. Shares of Hitachi Construction <6305.T> and Komatsu <6301.T> rose 6.6 percent and 4.7 percent, respectively.

Both companies assemble and sell their products in China.

The rise in the Nikkei was welcome news after government data showed foreign investors had sold $10 billion of Japanese stocks two weeks ago, the largest weekly outflow since March 2008.

We may well be able to say that the heavy foreign selling of two weeks ago has now come to an end, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> surged nearly 3 percent, led by the materials, energy and industrial sectors.

The MSCI index has already retraced more than half the losses incurred in the past two months resulting from concerns about Europe's debt crisis, though is still down 3.2 percent this year.

Hong Kong's stock market <.HSI>, the gateway to China for most global equity investors, rose 2.8 percent while the Shanghai composite index <.SSEC> gained 2.1 percent.

Chinese airline stocks were a big target, with China Southern Airlines <1055.HK> gaining 8 percent, on hopes that a stronger yuan will help reduce fuel costs.

Initial gains slipped at one point after China's central bank left the yuan's daily mid-point unchanged from Friday, but upward momentum recovered as the currency rose in the spot market.

U.S. stock futures rose 1.2 percent, pointing to a stronger open on Wall Street later in the day.

GATEWAY TO CHINA

Emerging Asian currencies also rose sharply.

Reasons for strength were two-fold: Asian reserve managers would not have to curb their own currency strength as much for competitive reasons if China lets the yuan rise, and hopes for more exports to China.

The U.S. dollar dropped 2.5 percent against the Korean won and was on pace for the biggest single-day decline in 13 months. The dollar was also down 1.6 percent against the Malaysian ringgit.

It's going to be a softly-softly approach in our view (for yuan appreciation). It is good for risk appetite, it is good for Asian currencies in general, said Mitul Kotecha, head of global foreign exchange strategy with Credit Agricole CIB in Hong Kong.

The euro and Australian dollar were steady on the day, having surrendered early gains after China left the daily mid-point of the yuan's exchange rate unchanged from Friday.

The euro was at $1.2430 and the Australian dollar was at US$0.8812.

U.S. Treasuries fell as cash was moved to riskier plays offering potentially higher returns. The benchmark yield on the 10-year note was up 6 basis points from late Friday in New York to 3.28 percent.

Commodities prices rallied as well on expectations that China's already voracious demand for raw materials would only increase.

Brent crude futures were up 1.7 percent to $79.52 a barrel and U.S. crude was up 1.9 percent to $78.67 a barrel, at the highest in six weeks.

Three-month copper on the London Metal Exchange rose 1.3 percent or $81 a metric ton to $6,516.

U.S. soybeans and grains futures also rose.

(Additional reporting by Elaine Lies in Tokyo and Kei Okamura in Hong Kong)

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