Yuan weakens for 3rd day, gap between official rate, market narrows sharply

Vietnam allowed the nation’s currency, the dong, to trade in a wider range, adding flexibility which could insulate the country’s exporters from China’s moves, while the Malaysian ringgit and the Indonesian rupiah both fell to their lowest levels since the 1998 Asian financial crisis.

Santos and Woodside Petroleum advanced more than 2 percent each after oil prices staged a modest bounce off six-year lows overnight, thanks to a weaker dollar and lower U.S. crude stockpiles. Some traders report they see evidence the central bank is buying yuan to stem the declines. The new rates could pose “disruptive” implications for the global economy, according to the New York Federal Reserve President William Dudley, in addition to strengthening the dollar.

It has since lowered the central rate twice more, and the week’s combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 per cent at a stroke.

Japan’s benchmark Nikkei 225 index fell into negative territory after the yuan fixing, but quickly hurled itself back above the flatline. The euro rose 1.1 per cent, breaching $1.11 (S$1.55) for the first time in three weeks and the US dollar fell 0.7 per cent against the yen to 124.19 yen.

Against that backdrop, China’s tight peg to an appreciating dollar meant the yuan’s real trade-weighted exchange rate had climbed more than 10 percent over the past year, even as its economy slowed and exports slumped.

The threat that a cheaper yuan poses to exports and economic growth in other countries.

Al Jazeera: How valid are fears that China’s move will trigger “a global currency war”, and what could such a war look like?

The stability of the CNY against the US dollar in recent years has helped to mitigate risks of competitive depreciation among emerging markets’ currencies, with the CNY acting as an anchor of stability in currency markets.

December Comex Gold futures weakened on profit-taking as worries subsided after China’s third intervention was readily absorbed by the financial markets. The surprise move earlier this week to loosen the mechanism that controls the yuan and send the currency lower reverberated through global markets but the turmoil is now abating.

Amid signs indicating the devaluation is a way of propping up exports, the People’s Bank of China said the yuan has been rising in value when supply and demand dictates that it should have fallen.

The latest European Central Bank minutes released earlier today showed that officials are more confident over inflation and the ability of current policy to prevent deflation.

Finally, the Chinese devaluation complicates the Fed’s decision-making.

As interest rates have fallen to zero and below in many developed economies, money printing has proliferated and exchange rates have become one of the few remaining levers to stimulate business activity and, in some cases, avoid deflation.

Al Jazeera: To what extent will US and EU economies be affected by the devaluation, especially given the expected interest hike in September in the US? It’s understandable that Beijing wants to offset some of that effective loss of its competitiveness against non-dollar currencies.