China has hit back against the Trump administration with a drastic exchange rate devaluation, almost guaranteeing a superpower showdown and a lurch towards full trade war.
The yuan blew through the symbolic line of seven to the dollar for the first time since the global financial crisis, with the offshore rate in Hong Kong spiking to 7.07 in moves that stunned seasoned traders.
The calculated action by the People’s Bank (PBOC) threatens to unleash a wave of deflation across the world and risks pushing East Asia and much of Europe into recession. It is certain to provoke a ferocious response from the White House.
Capital Economics said Beijing has taken the fateful step of “weaponising” its exchange rate and is digging in for a long struggle: “The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US.”
Commerzbank said China’s decision to engineer such a sudden move in its tightly managed currency has far-reaching implications for the whole international system. “It looks like a tsunami is coming.”
The shock waves were felt instantly through the nexus of global bond, equity and commodity prices. It triggered a flight to safe-haven currencies such as the Japanese yen and the Swiss franc, an effect compounded by the thin liquidity conditions of August trading.
Yields on 10-year German Bunds plummeted to minus 0.53pc, taking much of the eurozone sovereign bond market further into uncharted terrain. The euro Stoxx 50 index of equities has fallen 5pc since late last week.