China added fresh fuel to the trade war fire on Monday by letting it’s currency, the yuan (CNY) slide below the key $7-per-dollar level for the first time in more than a decade, sending global markets tumbling.
The move comes in the wake of President Trump’s abrupt decision last week to slap 10% tariffs on a further $300 billion of Chinese imports from September 1, a move that ended a month-long trade war truce between the two countries.
Trump also threatened to further raise tariffs if Chinese President Xi Jinping fails to move more quickly to strike a trade deal.
The tariffs move also came in the wake of the first US interest rate cut since 2008 last Wednesday, with the Federal Reserve shaving 25 basis points of its key funds rate to take it down to 2.00%, a move widely expected which weakened the dollar.
The President had been putting pressure on the Fed to ease rates to improve the competitiveness of the US currency, although later comments from the central bank’s boss, Jerome Powell which seemed to indicate that any further rate cuts were less likely in the future were not thought to be as much to Trump’s liking, and could have prompted the surprise tariff impositions the next day.
China vowed last Friday to fight against the tariff moves which had followed another round of inconclusive talks between negotiators for the two countries as they attempt to bring an end to the trade battle that Trump started last year.
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!— Donald J. Trump (@realDonaldTrump) August 5, 2019
In a tweet on Monday, Trump slammed China’s yuan move, saying: “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!”
In a note to clients, economists at ING pointed out: “The Chinese deny they are using the yuan as a trade tool. Tuesday's PBOC (People's Bank of China) fixing will help determine whether the People's Bank of China is letting the CNY float more freely.”
They added: “This is announced at 0315CET and the fixing will be assessed against model-based estimates and some whisper-numbers on where the fixing should come in.
“Unless the PBOC fixes USD/CNY below those model-based estimates, the market will again conclude that Chinese authorities have dropped their concern over a weaker Renminbi.”
US stocks tumble in response
The latest trade war twist pulled global markets into tail spins on Monday, with the Dow Jones Industrials Average plunging by almost 600 points, or 2.2% to 25,907 in midday trading in New York.
Joshua Mahony, senior market analyst at online trading group IG said: “Global markets have been hit hard by sinking expectations of a US-China resolution, with all signs pointing towards a resurgence of the US-China trade war despite previous progress.
“With the Chinese yuan hitting a 11-year low against the dollar, it seems the Chinese are happy to let the currency markets level the playing field for them. Despite Trump’s calls for the Fed to retaliate, it is not the role of the Fed to fight a currency war against the PBoC. Thus, we find ourselves in a position where Trump’s trade war has come up against the currency war tactics of the Chinese.”