The Australian and New Zealand dollars dropped sharply after China’s central bank set the midpoint for the yuan at 6.2298 per dollar, down from the previous day’s fix of 6.1162 per dollar, and said it was aiming for 2 per cent depreciation. But it is leading to speculation that China could take further steps to weaken its currency to help shore up slowing economic growth. Chinese exporters, whose profit margins are usually thin, will definitely be relieved, but at the same time the government has announced that the change was a one-time thing. A cheaper yuan also hurts U.S. manufacturers that want to sell to China and makes U.S. goods more expensive in relation to Chinese imports. Exports fell by an unexpectedly large 8.3 percent in July.
The declared reason for the devaluation, analysts say, may be viewed as China’s moving towards a market determined exchange rate but the devaluation itself on the other hand, is likely to be interpreted as interference. U.S. exporters have long complained that China manipulates its currency to gain a trade advantage.
Data released on Tuesday showed U.S. nonfarm productivity rebounded in the second quarter, but a weak underlying trend suggested inflation could pick up more quickly than economists thought.
China, which braved the crisis of 2008 along with other emerging economies, has been facing a multitude of problems over the last couple of years. That would be a robust performance for most developed economies, but in China it’s a marked slowdown from recent years. It said the move was aimed at making its foreign exchange system more responsive to market forces.
“As the event has boosted the US dollar and dampened local currencies, it is likely to be welcomed by regional central banks”.
“Gold’s best moment this year came in the first few months when we saw various FX swings, lots of different central banks cutting interest rates or intervening in their monetary policy, so probably there is some element of that which has helped the rally from Monday continue a bit”, Turner said.
A Chinese yuan sign is seen at a currency exchange shop in Hong Kong, Tuesday, August 11, 2015.
“The move signals that (China) is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy”, said Eswar Prasad, an worldwide economist at Cornell University. On Tuesday, the yuan was allowed to fall 1.3 percent shortly after the start of trading and was down almost 1.9 percent at midday. Gold fell as low as $1,093.25 before recovering to around $1,1109 an ounce as investors sought safety.
The yuan’s fixing against the U.S. dollar was lowered 1.9% Tuesday from the previous day, its biggest-ever move in a single day.