China guided its currency past another key point widely watched by investors, signaling it may be willing to weaponise the yuan should President Donald Trump follow through on his threat to put more tariffs on
China signals it will continue to weaken its currency as trade war rages
But China's action suggesting that it expects the currency to weaken further will put more focus on the central bank's daily midpoint in the coming weeks to see whether China will weaken the currency — perhaps to 7.5 or 8 yuan to the dollar — to the point at which it would significantly begin to weaken the impact of US tariffs. A higher number versus the dollar means a weaker currency.
The move could prompt central banks in the Asia Pacific region to explore cutting interest rates. On Wednesday, three central banks in the region reduced rates in a move that was widely seen as a defensive attempt to shore up their economies as the trade war threatens global growth. Central banks in India, Thailand and New Zealand cut interest rates in a cascade of surprise moves that set off currency markets.
"If the yuan, or when the yuan, falls significantly more, we should expect more monetary easing to offset what is a deflationary impulse for a lot of Asian countries and to restore some competitiveness," said George Magnus, an associate at Oxford University's China Center.
The Trump administration labeled China a currency manipulator Monday in the United States. But many economists and investors believe China in effect is loosening controls of its currency.
China kept its currency weak a decade ago to help its exporters, long prompting complaints from the United States and Europe. But in recent years, China's currency has strengthened to a level widely believed to be close to fair value. Today, as China's economic growth has slowed and the trade war has pinched its manufacturing sector, many economists believe the country's currency should be weakening versus the dollar.