A U.S.-China Currency War? What You Need To Know

Wall Street in New York City.- Selling on Wall Street accelerated early Monday as a steep drop in the Chinese yuan escalated the US-China trade war following President Trump's

"Short-term exchange rate does not have a lot to do with the fundamentals, it's much affected by the sentiment, it's very volatile, and not in a linear relationshiop", Guan Tao, a former director of the worldwide payments department at China's State Administration of Foreign Exchange, the currency regulator.

"Further weakness would send a signal that China wants to start a currency war, which we strongly believe is not the case because this would do little to benefit the Chinese economy as other Asian currencies would just weaken along with the yuan".

The decision is a step toward what could become an unusual kind of currency war, in which the USA would intervene to counteract the effects of China's weakened currency, or both countries even take steps to increase the value of the other's currency relative to their own. China's latest move came in retaliation to Trump's announcement that he would implement more taxes on Chinese imports to the US.

The yield gap between Chinese and US benchmark 10-year government bonds stood at 134 basis points on Friday afternoon, compared with a low of 28 basis points hit in November.

The following explains the working of China's currency regime.

"Clearly, they are manipulating their currency from a trade point of view", Navarro said Friday.

A U.S. Treasury official said Secretary Steven Mnuchin spoke with IMF Acting Managing Director David Lipton this week by telephone about currency consultations and also about the leadership succession.

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"It's extremely hard to make an objective case that this is warranted", said Obstfeld, now an economics professor at the University of California-Berkeley. China retaliated by lowering the value of the yuan and suspended purchases of U.S. agricultural products.

The International Monetary Fund has been reluctant to comment on the USA move.

"China isn't required to resist market pressure for a weaker currency", Setser says. It's really going to impact consumers even more and it's certainly, with the Chinese announcement that they're going to stop buying USA agricultural goods, that's going to hurt our farmers.

"The real effective exchange rate is one benchmark, and on that measure the yuan looks fairly valued at the moment", said Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore.

He said the Trump administration's actions call into question the legitimacy of the whole process for evaluating currency manipulations.

The trade war is weighing on the global economy.

The People's Bank of China on Thursday set the CNY reference rate above the 7-level for the first time since 2008, at 7.0039. It would also depreciate the value of Chinese yuan-held assets.

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