Chinese Yuan Devaluation Hits Asian Currencies

Those suggestions gained ammunition when the currency slid another 1.6 per cent on Wednesday.

Investors are anxious that more devaluations from China could hurt profits.

The yuan’s decline was small compared with fluctuations of freely traded currencies. It may also fan political tensions with the United States and Europe, whose exports could become comparatively costlier.

Foreign exchange traders later said state-owned banks were selling dollars on behalf of the PBOC, and the spot market ended at 6.3870, after rallying strongly towards the close, which will influence Thursday’s midpoint.

U.S. stock markets fell triple digits also for a second day in a row. Malaysia’s ringgit and the Indonesia rupiah plunged to their lowest levels in 17 years.

FXCM dollar index now stands at 11980, at its range low.

While a weaker yuan will not cure all the ills of China’s exporters, it will help relieve deflationary pressure. “This is just part of the financial reforms that they have promised for a long time”.

“Apparently, the central bank does not want the yuan to run out of control”, said a trader at a European bank in Shanghai. It said the fluctuations would “converge to a reasonably stable zone” following a “short period of adaptation”.

“While the move by the PBOC highlights the risks to the U.S. outlook, we retain our call for a September hike, but believe the probability has fallen somewhat, as the move may raise FOMC concerns about global growth and inflation pressures”, strategists at Barclays said.

The result: The yuan jumped about 1% in value against the dollar in the last few minutes of trading, bringing it to 6.3870 yuan against the dollar.

For the second-straight day, China has allowed its currency to take a sharp drop, sparking another round of falling stock prices internationally. The People’s Bank of China made its decision this week in view of a strong dollar and to further Beijing’s mission of letting free markets, rather than the Communist government, chart a course for the $10 trillion-plus economy.

Mizuho Bank described Tuesday’s devaluation as the “start of an engineered depreciation”. Many Western firms, including Philips, BMW and Volkswagen, have already warned of slowing growth in China. Initiatives by Japan and the European Union over the past two years depressed the yen and euro by wider margins than this week’s decline in the yuan.

Financials were the weakest sector in the U.S. stock market, falling 2%, as investors scaled back bets that the U.S. Federal Reserve would boost rates this year. The Fed was expected to act later this year.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers, a major step in terms of global use of the yuan.

The International Monetary Fund staff recommended last week that China wait until at least October 2016 to join.

The devaluation of the Chinese yuan has huge implications for rest of world demand and commodity prices but it was too early to judge what is happening with the Chinese currency policy, New York Fed President William Dudley said.

But some of Asia’s most interventionist central banks appeared to be holding their nerve on currency policy.