In early August, the Yuan fell below the level of seven against the dollar, raising speculations that China manipulated the currency in retaliation to U.S tariff sanctions.
Investors are now concerned over the possibility of a currency war between the two global giants.
President Donald Trump rebuked the currency devaluation and urged the Federal Reserve to act:
“China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
China’s Central Bank attributed the drop to “unilateralism and trade protectionism measures,” a reference to Trump’s threat last week to impose more tariff hikes on Chinese goods.
“It is normal (for the Yuan) to rise and fall.”
The Central Bank promised to institute measures that would stabilize the operations of the currency market.
U.S financial markets dropped sharply on Monday. Early that day, Dow tumbled more than 500 points, or 1.8%, while the S&P 500 fell 1.8%.
The Nasdaq Index, which lists many technology companies that do business in China, saw an even bigger drop — as of 10:02 a.m. Eastern time it was down by more than 200 points, or 2.5%, to 7,799 points.
By late afternoon, the Yuan weakened to 7.0391 to the dollar, making one Yuan worth 14.2 cents; its lowest value since February 2008.
“The fact that they have now stopped defending 7 against the dollar suggests that they have all but abandoned hopes for a trade deal with the U.S.,” Julian Evans-Pritchard, senior China economist with Capital Economics told clients in a report.
“The thought of a currency war is crossing more than a few traders’ minds,” Stephen Innes of VM Markets said in a report.
“Further weakening of the Yuan means that, globally, the pressure for the U.S. dollar to strengthen is rising,” Louis Kuijs of Oxford Economics said in a research note.
“Such dollar strength will be unwelcomed in Washington, D.C., where President Trump has openly complained about a strong dollar and has threatened to try to weaken the U.S. currency.”