China lets yuan weaken sharply against US dollar and euro

China let the yuan fall below the pyschological 7.0 yuan level to the US dollar on Monday, reaching its weakest level in a decade against the Greenback, in response to US President Donald Trump’s latest round of tariffs.

The yuan weakened sharply after the People's Bank of China set its daily reference rate for the currency at 6.9225, the lowest value since December, versus 6.8996 last Friday.

And as of 1206 BST, the spot US dollar-yuan rate was climbing by 1.44% to 7.0406, just below its weakest level since 2008, and by 2.05% to 7.8654 versus the euro.

The yuan is only allowed to move by 2% up or down from that reference level each day.

According to a statement translated by analysts at ING and posted by the People's Bank of China to its website, the central bank said that: "affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China, the RMB has depreciated against the US dollar today, breaking through 7 yuan, but the renminbi continues to be stable and strong against a basket of currencies."

Analysts at ING said that it was "fair to assume" that yuan weakness was a deliberate decision "and part of what we imagine will be a concerted series of steps aimed at pushing back at the latest US tariffs".

"It appears the Chinese authorities no longer see the need to limit the tools at their disposal and that the currency is now also considered part of the arsenal to be drawn upon."

Beijing also called on state buyers on Monday to stop purchasing US agricultural goods, possibly further adding to the tensions between the two countries.

Chinese authorities were responding to Trump's plans, announced during the previous week, to slap a 10% tariff on another $300bn-worth of Chinese exports, in effect extending the reach of the trade levies to cover all Chinese exports to the United States.

Some analysts expected China's response to go down poorly with Trump, who in the past had criticised Beijing for managing its currency unfairly and failing to keep promises to buy more US crops.

ThinkMarkets analyst Naeem Aslam said: "The Chinese Yuan crossed the level of 7.0 for the first time and this is only because China clearly wants to devalue its currency. Donald Trump will have no choice but to actually retaliate against this action. Afterall it is an ego issue for him. This means that he is going to do everything in his power to not let Beijing to win this war.

"Simply put, the escalation in the currency war means that the Fed will have to adopt ultra-dovish monetary policy, odds for another interest rate cut have jumped, and the only direction for the dollar index is to the downside."

Nonetheless, ING added that arguments against excessive yuan weakness remained, including a possible hit to Chinese shares and more attempts at capital outflows "which could tighten market liquidity and result in further economic weakness."

"We're not leaping to any conclusions and will take our time in considering if this is more of a gesture of defiance (today's fixing was only 0.33% weaker than last Friday's fix) or the beginnings of a concerted currency move. The next few days fixing levels will provide some useful information."

PBOC Governor Yi Gang said in statement on website that China won’t seek competitive depreciation or use FX as a tool to cope with the trade dispute. He said that the current yuan exchange rate is at appropriate level based onChina’s economic fundamentals and market supply and demand.