The US dollar fell against other major currencies after China’s market turmoil sparked a global rout on concerns about the health of its economy.
For the second time in four days, China suspended equities trading after stocks plunged. The government also announced other measures aimed at fostering a soft landing in the slowing economy, including a sharp devaluation of the yuan currency that raised talk of a currency war.
Authorities lowered the yuan’s central rate against the greenback by 0.51 per cent to 6.5646, the weakest since March 2011. The yuan closed at 6.5929 per dollar, its weakest level since mid-February 2011.
Analysts believe the yuan, or renminbi, will keep depreciating this year despite Beijing’s tight grip on currency flows. Mexico warned that China’s weakening of the yuan could trigger a global currency war, as the peso hit new lows against the dollar.
“As the yuan moves, worries begin around the world that we could be entering a cycle of competitive devaluations, which is frankly a perverse phenomenon because if all countries end up devaluating, nobody will make itself more competitive,” Mexican Finance Minister Luis Videgaray said.
Forex investors fled to the traditional haven of the yen, which rose 0.7 per cent against the greenback at 117.65 yen around 2200 GMT.
The euro also advanced — it is one of the so-called “funding” currencies investors plow into for buying riskier assets, like equities and commodities, which tumbled yesterday. The 19-nation currency jumped 1.4 per cent to USD 1.0928 and rose 0.6 per cent to 128.58 yen.
Analysts said the dollar was under pressure because the Chinese turbulence raised questions about how fast the Federal Reserve will tighten monetary policy, after making the first interest rate increase in more than nine years in December.
“All eyes remain focused on tomorrow’s US payrolls report for December, which could help clarify the extent to which the US remains, at least for now, a bright spot in the otherwise uncertain global economic outlook,” said Omer Esiner of Commonwealth Foreign Exchange.