A U.S.-China Currency War? What You Need To Know

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A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies. That mid-point is based on the yuan's movement in the previous session and moves in currencies of China's main trading partners.

Global financial markets tend to focus on the yuan's exchange rate to the US dollar, and it was effectively pegged to the greenback for a number of years.

Meanwhile, trade frictions are likely to continue to encumber China's yuan, with no resolution to the Washington-Beijing conflict in sight, as increasingly negative monetary sentiment adds to worries that the global economy may fall in a turmoil instead of the other way around. Analysts said there was no "shock value" from printing a 7-mark, as this happened Monday when the forex market hoisted spot CNY above the 7 and the Chinese central bank did not avert such upward move.

Later that day, the U.S. Treasury Department promptly labeled China a "currency manipulator".

Since the U.S. -China trade war began in April 2018, when Washington unveiled the first tariffs on some Chinese imports, the offshore yuan has tumbled 11% versus the dollar.

He pressed his relentless campaign against the United States central bank on Friday, but backed away from calls for a weaker exchange rate for the dollar.

A second Shanghai-based trader said trade talks that were scheduled for September in Washington, prior to the latest USA tariff threat, now seem unlikely, adding further pressure on the Chinese currency.

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With the four-year anniversary of China's shock devaluation approaching on August 11, currency traders are adjusting to a new reality without the line in the sand that has helped cushion declines since 2015.

- "persistent, one-sided intervention" in the foreign-exchange market to depreciate its currency. "I am not!" Trump said. Comments by President Trump suggesting that the US Dollar is too strong have led to fears of a potential currency war, but there is no evidence of this starting yet.

The yield gap between Chinese and USA benchmark 10-year government bonds stood at 134 basis points on Friday afternoon, compared with a low of 28 basis points hit in November.

"China isn't required to resist market pressure for a weaker currency", Setser says.

The exchange rate of China's yuan to the dollar hit the symbolic threshold of 7 to 1 at the start of the week, fuelling further speculation about a deliberate move by Beijing to boost support for its exports while engaged in a trade war with the United States, the world's largest economy.

The Fed trimmed rates by 25 basis points for the first time since the financial crisis on July 31, but China did not follow as some market watchers had expected.

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