Yuan Slides Past Key 7.0 Level, Stoking Currency War Fears
China's central bank guides the yuan lower in a move seen as a bid to support its export economy, rattling global markets and escalating US trade tensions.
Global financial markets were put on high alert Tuesday after China’s central bank allowed its currency to weaken past the critical 7.0 per dollar level for the first time since May 2023, a move that signals a potential shift in policy and raises the specter of a competitive devaluation.
The People’s Bank of China (PBOC) set the official midpoint reference for the yuan at 7.0348 per dollar, a significant deviation from the previous session's 7.0056. The decision immediately sent ripples through foreign exchange markets, with the offshore yuan (CNH), which trades more freely, also sliding past the symbolic threshold. The breach was significant enough to be flagged in breaking news by sources including The Wall Street Journal, underscoring its importance to global investors.
For years, the 7.0 mark has been viewed as a psychological line in the sand for the yuan. Beijing has historically intervened to defend this level to project currency stability and prevent capital outflows. Allowing the yuan to depreciate is widely interpreted by economists as a tool to make Chinese exports cheaper and more attractive on the global stage, providing a boost to the nation’s manufacturing sector amid signs of slowing domestic demand.
However, the move carries significant risks and invites comparisons to past escalations in the U.S.-China trade conflict. In August 2019, a similar breach of the 7.0 level during the height of the trade war led Washington to officially label China a "currency manipulator." While that designation was later dropped, the memory of the resulting market turmoil has investors on edge.
"Letting the yuan go beyond 7.0-per-dollar isn't just a technical move; it's a major policy signal," said a strategist at a Hong Kong-based investment bank. "It suggests authorities are comfortable with further weakness to support the economy, but it also opens a new front of uncertainty in an already tense U.S.-China relationship."
The immediate market reaction reflects this anxiety. While specific index data was being compiled, analysts expect a risk-off tone to dominate U.S. trading. A weaker yuan effectively raises the cost of U.S. goods for Chinese consumers and makes Chinese products more competitive, pressuring American companies with significant sales in the region and those competing directly with Chinese imports. According to analysis from past depreciation events, such moves can weigh on assets tied to global growth, including industrial metals like copper and iron ore, on fears of softer Chinese demand.
Investors will now be closely watching the PBOC's subsequent daily fixings for clues on whether this is a one-off adjustment or the beginning of a sustained depreciation trend. Any retaliatory rhetoric or policy action from Washington could further destabilize markets, turning a calculated economic maneuver by Beijing into a broader and more unpredictable currency war.