Global Markets Stressed After China Devalues Currency

China’s unexpected sharp currency devaluation has shaken the foreign-exchange market, boosting the US dollar and stirring concerns about a delay in the Federal Reserve’s plan to raise interest rates.

BEIJING, China – China’s bold move Tuesday to sharply devalue its currency threatens to squeeze exporters around the world whose goods will likely become comparatively costlier than many Chinese products. The yuan is linked to the dollar, which has jumped in the past year. Exports in July plummeted by an unexpectedly steep 8.3 per cent from a year earlier.

The Aussie and the kiwi are each down more than 10 per cent this year against the greenback as weakening Chinese demand drives down prices for the commodity exports on which the Antipodean nations’ economies depend. If we have a currency that moves much more freely, fine.

While previously the bank polled market makers to set the rate, it will now “comprehensively consider the supply and demand of foreign exchange” as well the latest worldwide market rates for foreign currencies, according to a statement. On Tuesday, the yuan was allowed to fall 1.3 percent shortly after the start of trading and was down almost 1.9 percent at midday.

EUROPE’S DAY: France’s CAC-40 fell 1.5 percent, and Germany’s DAX lost 2.6 percent. It came after second-quarter growth slowed to the least since 2012 and as China weakened the yuan’s reference rate by 1.9 percent on Tuesday. A further decline in the currency may make it hard for India to maintain its pace of monthly exports of $22 billion. Chuck Schumer, a New York Democrat.

Why is the Chinese government doing this?

The Treasury Department’s response was more measured.

The United States said it would be premature to assess China’s surprise yuan devaluation on Tuesday (Aug 11), warning than any reversal in Chinese reforms would be “troubling”. But the central bank said its goal was to give market forces a bigger role, a step the United States has demanded. Initiatives by Japan and the European Union over the past two years depressed the yen and euro.

“Seven per cent growth is a very respectable number but China has been experiencing double-digit growth for many many years”, McMaster University finance professor Luke Chan told CBC News in an interview.

The dollar index, which measures the greenback against a basket of six major currencies, was last up 0.04% at 97.197. Yin Tongyue, chairman of Chery Automobile Co., China’s biggest vehicle exporter, says he supports a weaker yuan as it is good for the company’s overseas sales.

The Fed wants to be “reasonably confident” that inflation is returning to its 2 per cent target before raising rates. Items whose exports were valued at over $1 billion included cotton, copper and its articles, mineral fuels and oils and organic chemicals.

If the U.S. economy continues to look healthy, wrote JP Morgan Chase economist Michael Feroli, “the yuan move will largely be a sideshow ” by September’s Fed meeting.

But the U.S. currency remained top heavy against the yen, due to sell orders around Y125 – a level the dollar has failed to surpass consistently in recent sessions.