Will China drop the dollar?

The trade war between the US and China is escalating further: the US government has officially branded China as a country that manipulates the course of its currency in order to secure unfair advantages in international competition. That said the Treasury Department in Washington. Beijing had previously devalued the Chinese currency renminbi, or yuan in international parlance. The move, in turn, was apparently a reaction to the new punitive tariffs imposed by the US government late last week.

US Treasury Secretary Steven Mnuchin will initiate talks with the International Monetary Fund to eliminate China's unfair competitive advantage, the Treasury Department said. China rejects the allegation. The People's Republic did not and will not use the yuan as a weapon in the trade dispute with the United States, the central bank of Beijing said on Tuesday. To classify China as a currency manipulator is a serious violation of international rules.

China's central bank chief Yi Gang recently announced that the People's Republic would not take part in a devaluation race. A Chinese government adviser said, however, that the yuan devaluation was triggered by Trump's unexpected announcement of new US punitive tariffs last week. The central bank had been preparing the move for a long time. "The responsibility lies with the US," it said.

On Monday, China dropped the value of its local currency below the seven yuan per dollar mark for the first time in eleven years. For a long time, this mark was considered by experts to be the supposed "red line" that the Chinese central bank would not cross. The fact that it has now allowed it to do so aroused fears among analysts that China could use the exchange rate as a weapon in the trade war with the United States. A lower exchange rate makes Chinese export goods cheaper and somewhat cushions the damage caused by the special US tariffs.

The yuan exchange rate does not move entirely freely according to market forces, but is controlled within limits by China's central bank. With every market movement, this raises the question of the extent to which the price movement was brought about by the market participants or by the central bank.

Stock exchanges give way

The trade war between China and the USA severely affected prices on the US stock market at the beginning of the week. The leading Dow Jones index fell by 2.90 percent to 25,717.74 points. The S&P 500 fared similarly with minus 2.89 percent to 2844.74 points. Both indices had meanwhile lost more than three and a half percent on Monday. The Nasdaq 100, which is dominated by technology stocks, got even worse, rattling down by more than four percent at times and ending the day with minus 3.60 percent to 7415.69 points.

The markets in Asia and Europe also fell - the German leading index Dax lost 1.80 percent. In Tokyo, the Japanese leading index Nikkei lost around two percent to 2299 points by noon. The MSCI index for Asian stocks outside of Japan was down nearly three percent. The index of the most important companies on the Chinese stock exchanges in Shanghai and Shenzen and the market in Shanghai were more than two percent lower.

The US has not accused China - or any other country - of currency manipulation since 1994. In May, the US Treasury Department refused to sanction China for manipulating the currency.

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