China’s move on Monday to escalate its trade war with the United States sent the U.S. stock market tumbling, with the Dow Jones Industrial Average dropping more than 950 points, according to CNN.
For the first time in a decade, China “devalued the yuan to fall below its 7-to-1 ratio with the US dollar”, which could help mitigate the effects of President Donald Trump’s tariffs.
The move has Wall Street on edge as concern grows that a currency war could be in store or that Trump will respond with even more tariffs. The president tweeted on Monday, “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!”
Should Trump choose to strike back by attempting to devalue the dollar, investors worry the ensuing currency war would weaken purchasing power here at home.
“Risks of Trump intervening in foreign exchange markets have increased with China letting the yuan go,” Viraj Patel, FX and global macro strategist at Arkera, warned on Twitter. “If this was an all out currency war – the US would hands down lose. Beijing [is] far more advanced in playing the currency game [and has] bigger firepower.”
The People’s Bank of China, the country’s central bank, said the weakened yuan was largely due to “trade protectionism and new tariffs on China.”
The move was seen by analysts at Capital Economics as proof that China has “all but abandoned” its hopes of striking a trade deal with the U.S.
Stocks also dropped in response to the Chinese government’s Monday announcement that its companies are no longer buying American agricultural products, CNN noted.