Chinese yuan falls to 11-year low amid trade tensions

China's yuan fell below the politically sensitive level of seven to the U.S. dollar on Monday, adding to trade tension with Washington.

The currency weakened to 7.0391 to the dollar by late afternoon, making one yuan worth 14.2 cents, its lowest level since February 2008. That's the biggest one-day drop in four year and follows President Donald Trump's threat last week of tariff hikes on additional Chinese imports in a fight over Beijing's trade surplus and technology policies. 

The yuan's weakness is among a series of U.S. complaints that are fuelling tensions with Washington. American officials complain a weak yuan makes China's exports too inexpensive, hurting foreign competitors and swelling Beijing's trade surplus.

The level of seven yuan to the dollar has no economic significance, but could revive U.S. attention to the exchange rate.

The People's Bank of China, which keeps the currency in a narrow range, blamed the decline on "trade protectionism," a reference to Trump's tariff hikes in a fight over Beijing's trade surplus and technology policies.

Trump's tariff hikes have put downward pressure on the yuan by fuelling fears economic growth might weaken.

Prospect of currency war

They've also forced down markets worldwide as investors brace for volatility amid the trade tensions. Last week was one of the worst of the year for stocks. 

U.S. President Trump slammed China's decision to let its yuan currency breach the key seven-per-dollar level for the first time in more than a decade, calling it "a major violation" and jabbing the U.S. central bank.

"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!" Trump tweeted.

The president has been critical of the U.S. Fed for not making a big enough cut to interest rates last week.

"The thought of a currency war is crossing more than a few traders' minds," Stephen Innes of VM Markets said in a report.
 
The prospect of heightened U.S.-China trade tension sent the Dow Jones industrial average tumbling throughout the day Monday.

China has not yet used all the tools in its arsenal in this trade war. State media were reporting that China has not ruled out slapping tariffs on agricultural products from the U.S. bought since Aug. 3.  Reuters says the Commerce Ministry has told Chinese companies to stop buying U.S. agricultural products.

The U.S. Treasury Department declined in May to label China a currency manipulator but said it was closely watching Beijing.

Chinese leaders have promised to avoid "competitive devaluation" to boost exports by making them less expensive abroad. But regulators say they are trying to make the state-controlled exchange rate more responsive to market forces, which are pushing the yuan lower.

Lower yuan offsets tariffs

The yuan, also known as the renminbi, or "people's money," has lost four per cent since hitting a high in February of 6.6862 to the dollar.

That helps exporters cope with tariffs of up to 25 per cent imposed by Trump on billions of dollars of Chinese goods. But it raises the risk of inflaming American complaints.

Trump rattled financial markets Thursday by announcing plans for 10 per cent tariffs on $300 billion US of Chinese goods, effective Sept. 1. That would extend penalty duties to almost all U.S. imports from China.

China's central bank sets the yuan's exchange rate each morning and allows it to fluctuate by two per cent against the dollar during the day. The central bank can buy or sell currency — or order Chinese commercial banks to do so — to dampen price movements.

The Treasury report in May said U.S. authorities believe direct central bank intervention this year "has been limited." However, it urged Beijing to "take the necessary steps to avoid a persistently weak currency."

A weaker yuan also might disrupt Chinese efforts to shore up weakening economic growth by encouraging an outflow of capital from the world's second-largest economy. That would raise borrowing costs.