There is likely to be volatility into long-dormant foreign exchanges and possible additional pressure on world markets because of the trade war between the United States and China being dragged into the currency market, warned analysts,  as Washington identified Beijing to be a currency manipulator. This US decision came after a significant drop in the value of the Chinese yuan beyond a previously maintained sacrosanct level on Monday which the US claims was initiated by China. .

On Monday, the yuan dropped past the historic 7 per dollar mark for the first time in 11 years which the US and analysts viewed to be China’s response to the most recently announced 10 per cent tariffs on the remaining $300 billion of Chinese imports into the US announced by US president Donald Trump last week. .

There is huge symbolic, of not direct economic, importance of China allowing the free fall of its currency against the US dollar in order to cushion the impact of the trade war with the US which has been ongoing for more than year now. Analysts say that this measure by China shows that in response to tariffs by Trump, China would not refrain from using its currency as a retaliatory tool.

On the other hand, there has been a prolonged period of calm in the forex market but analysts and investors believe that this move now opens up the market to volatility because of the use of currency as a trade war weapon. They fear that other countries could also emulate this tactic of weakening their currencies to offset their economies against global slowdowns.

“This is the formal introduction of currencies into the trade war,” said Richard Benson, head of portfolio investments at foreign exchange asset manager Millennium Global. “If anything, it had been currency stability that was used within the trade war. Now this is an overt, explicit move by the Chinese in response to Trump’s tariffs,” Benson added.

The future value of currencies would be difficult to predict, Benson said, because while fundamentals of economics demand that an investor buys the dollar, the risk that the currency could be used as tool for retaliation forces one to sell off the US dollar.

The immediate winners and losers of the devaluation of the yuan was very obvious

The steepest drop in 2015 in the value of the yuan happened in Monday. Analysts however noted that drop appeared to by taking place in an orderly fashion as well as it appeared that the fall did not worry the Chinese authorities.

This resulted in the plunging of currencies of any such country that has even a small but open economy and one that is tied to globalization. There was a drop in currencies of the emerging market across the board while there were some instances of step losses – for example in South Korea which is sensitive to trade issues.

According to analysts and investors, the manner in which the United States reacts to the drop in the yuan would be the deciding factors in whether there is a more dramatic fallout for forex markets. The current forex market is only half of its 2016 levels even though there it had risen to its highest in four months.

(Adapted from Reuters.com)

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