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Why a weaker yuan forces the Fed to cut rates further

China’s devaluation of its currency as a weapon in the ongoing trade war with the U.S. may result in a more aggressive Federal Reserve.

“The [tariff] action and the selloff in global markets and the strengthening of the U.S. dollar is going to force the Fed to cut rates further,” says Alicia Levine, chief strategist at BNY Mellon Investment Management.

China allowed the yuan to weaken past the psychologically important point of 7 to the U.S. dollar for the first time in more than a decade.

Investors around the globe responded swiftly, dumping equities and running to the relative safety of gold and U.S. Treasuries.

On Wall Street, the Dow Jones Industrial Average sank more than 500 points, or more than 2% midday, following 1%-2% selloffs in major stock indexes in Asia and Europe.

‘Are you listening Federal Reserve?’

President Trump was quick to tweet his thoughts and call out the Federal Reserve, once again:

While the central bank is not mandated to involve itself in the currency markets, analysts say the stronger dollar puts the U.S. at a disadvantage on the world stage because it makes American-made goods and services more expensive relative to other world currencies.

“A 25 bps cut [in September] is in the bag,” Levine tells Yahoo Finance. “If there was any question, that question is gone.”

Levine says the Fed should have cut by 50 bps in July to get away from “chasing the market.” She questions what tools the Fed will have to combat an economic downturn, if and when a downturn occurs. The Fed cut interest rates by 25 basis points in its policy-setting meeting on July 31, marking the first time the central bank has reduced the benchmark interest rate since it battled the financial crisis in 2008.

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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