The Bloomberg-JPMorgan Asia Dollar Index fell to the lowest level since April 2009 as China’s central bank weakened the yuan’s reference rate for the seventh day in a row, heightening the risk of a currency war.
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Analysts said Beijing’s introduction of the circuit breaker mechanism had proved counter-productive as the suspension in trade unnerved investors who were anxious that they would not be able to sell shares they do not want.
“It’s inevitable: the People’s Bank of China is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure”, said Chen Xingdong, chief China economist at BNP Paribas. While the stock market was reacting to the devaluation of the Chinese yuan instituted by the PBOC the halting of trading just compounded the situation instead of alleviating tensions.
The offshore yuan fell as low as 6.6185 to the dollar, its weakest since early 2011.
The fallout poses a threat to the British economy and the rest of the world due to the sheer size of China’s financial influence.
The yen was last up 0.4 percent at 118.00 yen per dollar and up 1.2 percent against the Aussie at 82.80 yen. The Dow lost 1.5 percent, the tech-heavy Nasdaq dropped 1.1 percent and the S&P 500 fell 1.3 percent.
The Fed worked through similar global market turmoil last summer when a market selloff in China triggered a fall in US stocks, prompting the USA central bank to hold off on a widely anticipated rate hike at its September policy meeting.
“We’ve had a stabilisation in China overnight, but the question remains as to whether China’s economy is headed for a hard or soft landing”, said Richard McGuire, senior fixed income strategist at Rabobank.
The renminbi will go with changes of demand and supply in the market, and its exchange rates will change in both directions, it said.
Seoul shares hit four-month lows and the won touched a four-month low versus the dollar as the turbulence in China’s stock market and heightened geopolitical risks stemming from North Korea’s widely-reported hydrogen bomb test rattled investors. But if Chinese stocks suffer further routs, markets are unlikely to be in the mood to closely watch USA economic data, including a key jobs report for December.
On Wednesday, offshore yuan was trading 2.29 per cent softer than the onshore spot at 6.7130 per dollar, the widest spread between the two markets. It was last up 0.2 percent at 127.96 yen and up 0.6 percent versus the greenback at $1.0844.
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Any figure around that level would no doubt boost expectations of another increase in United States interest rates in March – a decision that might be expected to prolong the markets’ gloomy view of future prospects.
