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
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
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.