China tries to quell fears of more big devaluations

With the bank having said that Tuesday’s move was a “one-off depreciation”, the rapid drop in the value of China’s currency – about 4% in the past two days – dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war.

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But if China’s action indeed spurs a currency war, other currencies would depreciate while dollar strength continued, analysts said, which would eventually weaken gold.

Though the official Chinese explanation for the sharp devaluation on Tuesday was that it was a one-off event aimed at reflecting the true value of the currency-vital if the International Monetary Fund is to accept the yuan in the basket of SDR currencies-the fact that the yuan was allowed to fall for the second day makes it clear the impact is yet to play out fully.

Financial spreadbetters expect Britain’s FTSE 100 to open 0.6 percent lower, Germany’s DAX to start 0.9 percent lower. Wall Street looked poised for further losses, with both Dow and S&P futures down 0.9 percent.

The risk the Chinese economy, the world’s second-biggest, is weakening even faster than expected.

Chinese economic data released late in the Asian session underscored Beijing’s need to prop up its economy. Along with about a third of South Korea’s and more than a quarter of Taiwan’s.

The yuan hit a four-year low against the dollar on Wednesday, its weakest since August 2011, after the Chinese central bank set the yuan’s daily midpoint even weaker than in Tuesday’s devaluation. Brent crude, a benchmark for global oils used by many U.S. refineries, rose 12 cents to $49.30.

The move surprised the market and prompted the lowest valuation of the yuan since October 2012.

The yuan’s decline was small compared with fluctuations of freely traded currencies.

It was 0.22% weaker than yesterday’s USD/CNY closing level of 6.387 and 1.11% weaker than Wednesday’s fixing of 6.3306.

The devaluation suggests policy makers are now placing a greater emphasis on supporting exports.

China’s central bank has revised the way it calculates its guidance rate to better reflect market forces. It was the biggest one-day fall in the yuan since a massive devaluation in 1994. Shares in exporters such as Caterpillar and General Electric fell in the market rout this week, though many economists say the yuan’s drop so far isn’t significant enough to do much damage.

It sparked complaints in Washington, where members of Congress have long complained Beijing manipulates its currency to gain a trade advantage.

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With rupee being one of the strongest currencies over the last few months, India has seen a decline in its exports, which fell for the seventh straight month in June, contracting 15.82 per cent year-on-year.

Gold hits 3-week high on lower dollar, shares after yuan devaluation