China Shocks Currency Market With Bank’s Decision to Devalue Yuan vs. Dollar

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The People’s Bank of China allowed the yuan to depreciate almost 2 percent against the U.S. dollar to levels last seen three years ago, sending a shock through currency markets.

In a statement, the Chinese central bank said that it had changed the way it calculated the currency’s daily midpoint against the greenback, now taking the midpoint from market-makers quotes and the previous day’s closing price.

The PBOC set Tuesday’s midpoint at 6.2298 per U.S. dollar, down from 6.1162 on Monday.

China’s spot yuan fell nearly 2 percent in early trading on Tuesday, heading for its biggest daily drop ever. The yuan was quoted at 6.3080 versus the dollar in early trade, weakening from 6.2097 at the closed on Monday. It fell 0.7 percent during the global financial crisis in December 2008.

“It looks as though the weakened trade numbers were the last straw for China’s tolerance of a strong exchange rate in the face of weak global demand for its exports,” Sean Callow, senior currency strategist at Westpac told CNBC.

Chinese exports slumped 8.3 percent in July, the biggest drop in four months and far worse than expectations for a 1 percent fall. Exports to the European Union fell 12.3 percent in July while those to the United States dropped 1.3 percent.

“It is certainly to be welcomed after an extended period of stability in dollar-yuan,” he said.

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SOURCE: Ansuya Harjani
CNBC

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