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China lets the yuan weaken to 7 against the dollar, its lowest in a decade

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(CNN) — The Chinese yuan dropped sharply on Monday to its weakest level against the US dollar in more than a decade, raising fears of further dangerous escalation in the US-China trade war.

The yuan fell after the People’s Bank of China set its daily reference rate for the currency at 6.92, the weakest rate since December. China’s central bank sets a “band” every day within which the yuan’s value is only allowed to move 2% up or down.

In mainland China, one US dollar now buys about 7.03 yuan. In trading outside of China, where the yuan moves more freely, it stands at 7.07 to the dollar. Earlier, it had slipped to a record low offshore.

The symbolically important threshold of 7 was last crossed during the 2008 financial crisis.

The central bank said that it is fully capable of keeping the yuan “reasonable and balanced,” adding in a statement that Monday’s weakness was mostly because of “trade protectionism and new tariffs on China.” President Donald Trump announced a new round of tariffs on the country last week.

Devaluing the yuan is one way China has of retaliating against Trump’s tariffs, but it’s fraught with risk.

The market took the Chinese central bank’s decision to lower the fixing rate that much as a “message of intent” to Trump, said Chris Weston, head of research at Pepperstone Group, in a research note.

He added that the yuan’s depreciation will trigger fears about capital flight from China, along with a subsequent tightening of financial conditions in the Chinese economy.

In mainland China, one US dollar now buys about 7.03 yuan. In trading outside of China, where the yuan moves more freely, it stands at 7.07 to the dollar. Earlier, it had slipped to a record low offshore.

In its statement, China’s central bank said it would take targeted measures as necessary to crack down on speculation and stabilize market expectations.

Citigroup strategist Gaurav Garg saw the decision to “unleash” the exchange rate as a potential response to the trade tensions that “may further complicate the US-China negotiations.”

“US authorities have been sensitive to currency moves,” he wrote in a research note. “They have on multiple occasions blamed currency manipulation to dampen the impact of trade tariffs and have insisted on currency stability as an important part of any agreement between the US and China.”

Markets across Asia tumbled in early trading on fears about the trade tension.

Japan’s Nikkei dropped 1.7% and South Korea’s Kospi lost 2.6%. The Shanghai Composite Index fell 1.6%. In Hong Kong, where protest leaders called on people to participate in strikes across the city, the Hang Seng Index fell as much as 3.1%, the biggest drop since October.

“Risk aversion had certainly been the latest theme for markets, one to weigh on both Asia equities and currencies,” said Jingyi Pan, a market strategist for IG Group. “Trade jitters linger for Asia markets going into the fresh week.”

Trump ratcheted up his country’s trade war with China last week when he announced plans Friday to slap a 10% tariff on $300 billion worth of goods. That means effectively all Chinese exports to the United States will soon be taxed.

Beijing, meanwhile, said it was ready for a fight.

Here are some of the other big moves on Asian markets at 3:00 p.m. Hong Kong time.

  • HSBC shares that are listed in Hong Kong dropped 1.5% after the British banking giant announced John Flint will step down as chief executive. HSBC said a change was needed because of an “increasingly complex and challenging global environment.”
  • Hang Seng Bank, a unit of HSBC and one of Hong Kong’s largest lenders, tumbled 3.8%. In an earnings report, the bank cited a “a challenging operating environment” and slowing economic growth in the city. It forecast full-year GDP growth for Hong Kong to reach between 1% and 1.5%, down from from last year’s 3%. “Downshifts in retail sales and trade growth signal that the economic environment will remain challenging,” the bank said.
  • Last week, the S&P 500 index and the Nasdaq Composite Index both posted the worst week for the year, down 3.1% and 3.9% respectively. The Dow Jones Industrial Average was down 2.6% for the week.

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