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Trump's tariff threats smash Chinese yuan against US dollar

Lianna Brinded
Head of Yahoo Finance UK
U.S. President Donald Trump, U.S. Secretary of State Mike Pompeo, U.S. President Donald Trump's national security adviser John Bolton and Chinese President Xi Jinping attend a working dinner after the G20 leaders summit in Buenos Aires, Argentina December 1, 2018. Photo: REUTERS/Kevin Lamarque/File Photo

The Chinese yuan tanked against the US dollar (CNHUSD=X) in early Asian trading after US president Donald Trump said he would impose tariffs on $300bn (£246bn) worth of Chinese products.

Chinese yuan fell by over 1.6% to 7.108 against the US dollar, breaking a 7-level — a key threshold for the currency — hitting a low last seen in 2008. Darin Friedrichs, senior Asia commodity analyst at Intl Fcstone, said that Trump’s announcement “surprised the markets.

Chart: Yahoo Finance

Trump initially announced on Twitter that he would impose 10% tariffs on amore Chinese goods, effective 1 September:

“Trade talks are continuing, and during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country...We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”

The tweet just came a day after the White House said that meetings between China and the US were “constructive” and that China would increase purchases of US agricultural exports.

Trade negotiations between the two nations are set to continue in September.

Asian markets continued to sink on the news, with Hong Kong’s Hang Seng Index leading the declines. It dropped by nearly 3%.

Chart: Yahoo Finance

Meanwhile Japan's Nikkei 225 index fell by over 2%. However, China’s Shanghai Composite fell by just under 1%.

”The Chinese authorities have allowed the yuan to weaken though USD/CNY 7, a move that has more symbolic than economic significance, but is sending shock-waves through August markets,” said Kit Juckes, an analyst at Societe Generale.

Julian Evans-Pritchard, senior China economist from Capital Economics added:

“Concerns about the psychological effects of breaching 7.00 and the impact on capital outflows may have played a role. But we doubt this was their main consideration, as tighter capital controls mean that the People's Bank of China has a much better handle on outflows then during the renminbi devaluation in 2015.

“Instead, we think they were holding back in order to avoid derailing trade negotiations with the US. The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US.

“Indeed, in a statement likely to anger Trump, the PBOC has explicitly linked today’s devaluation with the renewed tariff threat made by the US last week. In doing so, the PBOC has effectively weaponised the exchange rate, even if it is not proactively weakening the currency with direct FX intervention.”