WASHINGTON (AP) — President Donald Trump accused China of manipulating its currency after Beijing let the yuan fall to a politically sensitive level against the U.S. dollar for the first time in 11 years. The move raised concern that China could use its currency as a weapon in a trade war with Washington.
“It’s called ‘currency manipulation,’ ” Trump tweeted Monday morning, adding that, “This is a major violation which will greatly weaken China over time.”
The currency weakened to 7.0391 to the dollar by late afternoon, making one yuan worth 14.2 cents, its lowest level since February 2008. The level of seven to the dollar has no economic significance but carries significant symbolic weight.
“The thought of a currency war is crossing more than a few traders’ minds,” Stephen Innes of VM Markets said in a report.
The prospect of heightened U.S.-China trade tension sent the Dow Jones industrial average tumbling more than 590 points in midmorning trading.
China’s central bank blamed the yuan’s drop on “trade protectionism” — an apparent reference to Trump’s threat last week to impose tariffs Sept. 1 on the $300 billion in Chinese imports to the United States that he hasn’t already targeted.
The U.S. and China are engaged in a bitter dispute over allegations that Beijing steals trade secrets and pressures foreign companies to hand over technology as part of an aggressive campaign to make Chinese companies world leaders in advanced technologies such as artificial intelligence and quantum computing.
The weakness of the yuan, also known as the renminbi, or “people’s money,” is among U.S. grievances against Beijing. American officials complain that a weak yuan gives Chinese exporters an unfair price edge in foreign and trade helps swell trade surplus.
The U.S. Treasury Department declined in May to label China a currency manipulator but said it was closely watching Beijing.
China’s central bank sets the exchange rate each morning and allows the yuan to fluctuate by 2% against the dollar during the day. The central bank can buy or sell currency — or order commercial banks to do so — to dampen price movements.
It appears “the currency is now also considered part of the arsenal to be drawn upon,” Robert Carnell of ING said in a report. He said Monday’s move might be part of “a concerted series of steps aimed at pushing back at the latest U.S. tariffs.”
Until now, economists had expected the People’s Bank of China, the Chinese central bank, to intervene and put a floor under the currency if it threated to breach the seven-to-the-dollar level.
A central bank statement Monday blamed “unilateralism and trade protectionism measures,” a reference to Trump’s tariff hikes. But it tried to play down the significance of “breaking seven.”
“It is normal to rise and fall,” the statement said. It promised to “maintain stable operation of the foreign exchange market.”
Chinese leaders have promised to avoid “competitive devaluation” to boost exports by making them less expensive abroad — a pledge the central bank governor, Yi Gang, affirmed in March. But regulators are trying to make the state-controlled exchange rate more responsive to market forces, which are pushing the yuan lower.
Trump’s tariff hikes have put downward pressure on the yuan by fueling fears economic growth might weaken.
The yuan has lost 5% since hitting a high in February of 6.6862 to the dollar.
That helps exporters cope with tariffs of up to 25% imposed by Trump on billions of dollars of Chinese goods. But it raises the risk of inflaming American complaints.
Trump rattled financial markets Thursday by announcing plans for 10% tariffs on an additional $300 billion of Chinese goods, effective Sept. 1. That would extend penalty duties to almost all U.S. imports from China. The United States has already imposed 25% tariffs on $250 billion worth of Chinese imports.
The Treasury report in May urged Beijing to take steps “to avoid a persistently weak currency.”
A weaker yuan also might disrupt Chinese efforts to shore up cooling economic growth. It would raise borrowing costs by encouraging an outflow of capital from the world’s second-largest economy.
Globally, a weaker yuan might lead to more volatility in currency markets and pressure for the dollar to strengthen, Louis Kuijs of Oxford Economics said in a report. That would be “unwelcome in Washington,” where Trump has threatened to weaken the dollar to boost exports.
A weaker dollar “would be bad news” for Europe and Japan, hurting demand for their exports at a time of cooling economic growth, Kuijs said.
The Chinese central bank tried to discourage speculation last August by imposing a requirement that traders post deposits for contracts to buy or sell yuan. That allows trading to continue but raises the cost.
Beijing imposed similar controls in October 2015 after a change in the exchange rate mechanism prompted markets to bet the yuan would fall. The currency temporarily steadied but fell the following year.