The big story in markets on Tuesday is news out overnight that China devalued its currency. She said that would represent a “sea change in China’s exchange rate policy” but would help to support flagging economic growth.
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The yuan had been locked in an extremely narrow intraday range since March, varying only 0.3 percent. Afterwards, the yuan fell to a three-year low against the dollar.
China’s exports posted a surprisingly steep decline of 8.3% in July from a year ago, according to trade data released over the weekend. By allowing the yuan to weaken, China is helping its exporters regain their competitive edge.
Their relative weakness of their currencies has given China’s rivals an advantage in the export market, as the data shows.
However, the agency maintained that 2 percent devaluation of Yuan alone is unlikely to aid Chinese exporters who are suffering from surplus capacity and moderating global demand.
U.S. stocks surged Monday, with the Dow Jones Industrial Average snapping a seven-session losing streak, as a Berkshire deal boosted Wall Street sentiment.
China becomes the third major economy to act to lower its currency value. Initiatives by Japan and the European Union over the past two years depressed the yen and euro.
That was the biggest one-day decline since Beijing ended the yuan’s direct link to the U.S. dollar in July 2005 and switched to basing the exchange rate on a basket of foreign currencies. But any change raises the risk of tensions with China’s trading partners.
China’s currency move unnerved global investors Tuesday. Chuck Schumer. “Rather than changing their ways, the Chinese government seems to be doubling down”.
The Treasury Department’s response was more measured.
The bank said starting Tuesday that in addition to the previous day’s exchange rate, the daily fixing of the trading band will take into account supply and demand.
The global Monetary Fund said the change “appears a welcome step” to give market forces a bigger role.
“This complex situation is posing new challenges”, said a central bank statement. Its economy expanded at a rate of 7.4% in 2014-the slowest level in decades. A rate hike would likely raise the value of the dollar, which has already jumped about 14 percent in value in the past 12 months against a basket of foreign currencies.
India’s exports will be hit and the trade deficit might widen after the devaluation of Chinese currency yuan by 2 percent, which is bound to raise the competitiveness of outbound shipments from the neighbouring country, exporters’ body FIEO said on Tuesday. By making Chinese goods comparatively cheaper in the United States, a weaker yuan would push already-low U.S. inflation even lower.
U.S. analysts said the decision is expected to add further momentum to the strong dollar, which would be a headwind against U.
“For a long time, I gave the PBOC credit for holding the line on the renminbi (yuan) and recognizing that while it might be tempting to try to shore up the old-growth model by devaluing the currency, that really was a dead end”, said fund manager Patrick Chovanec of U.S.-based Silvercrest Asset Management.
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Beijing will likely move cautiously, but market expectations of further weakening “could quickly become entrenched” and cause the yuan to “depreciate quite quickly and significantly”, Wang said.
