The yuan has fallen about 10 percent since mid-April.
Beijing has remained unusually quiet over US President Donald Trump’s latest threat of imposing tariffs on, essentially, all Chinese imports. It surprised markets when he specifically commented on the Dollar’s strength and a potential interest rate hike by the Federal Reserve Bank.
The import of the foreign exchange currency diversification is aimed at checking the rising pressure on the United State currency- Dollar which high demand for all global transaction before now has had a negative impact on the county’s inflationary trend, leading to the devaluation of the Nigerian currency – the Naira.
Jasper Lawler, head of research at London Capital Group, called China’s lowering of the trading band “the starting of a currency war” in response to the trade war.
Currency wars occur when a number of countries seek to depreciate the value of their own currencies in order to stimulate their economies, Investopedia writes. The yuan “will be more stable, as the United States could interpret further depreciation as a form of retaliation”, they said, sticking with a three-month forecast of 6.7 per dollar. “Businesses can export more and the country benefits from stronger economic growth”.
Giving companies access to yuan may make it easier for them to do business with China, but it’s unlikely to bolster the naira much, according to Omotola Abimbola, a bond and currency analyst at Ecobank Transnational Inc. “That hurts consumers and adds to inflation”.
What is China doing now?
Signs that the Bank of Japan could scale back its monetary stimulus faster than expected sent tremors through bond markets on Monday, while European stocks slid as threats of further USA tariffs on China drained risk appetite. That could in turn boost an economy that posted its slowest growth rate in almost two years – 6.7% – in the second quarter.
“The (yuan’s) slide against the U.S. dollar will substantially cushion the impact on Chinese exporters from the planned next round of United States tariffs”.
However, it is a high-risk strategy.
The dollar fell against most major currencies on Friday, adding to Thursday’s declines.
The report rekindled anxieties about global monetary policy easing and piled further pressure on investors already struggling to navigate rising protectionism and tense geopolitics.
Leaders at the Fed seemed unfazed by Trump’s remarks, however, emphasizing that USA monetary policy operates independently from political concerns.
The yuan weakened nearly 1% against the USA dollar on Thursday to hit its lowest level in a year.
As China’s officials determine whether to respond to Trump’s yuan manipulation charge, economists say there are clear arguments for a cheaper Chinese currency, justifying the current weakness.
“There’s no negotiating going on that I can see”, Dollar said.
“We’re down a tremendous amount”, Trump said in an interview about trade imbalances with China on CNBC television broadcast on Friday.
He had told CNBC that he was “not thrilled” that the USA central bank is raising interest rates as the economy improves, and in his tweet repeated his claim that the Fed is undoing the economic progress the country has seen during his presidency.