Yuan pulls off lows, yen slumps after China takes steps to stem currency slide

The People's Bank of China set its daily reference rate at 6.9683 per dollar, compared with an estimated 6.9871 according to the average of forecasts by 19 traders and analysts in a Bloomberg survey. PHOTO: EPA-EFE

TOKYO (REUTERS) - The offshore yuan managed to come off an all-time low on Tuesday (Aug 6) after Beijing appeared to take steps to prevent the currency from sliding further, following a sharp drop that prompted the US government to label China a currency manipulator.

The yen slumped against major currencies as China's response in the trade war forced speculators to give up short-term bets that risk aversion would push the Japanese currency higher.

Yet, highlighting the shakeout in asset markets after Monday's rapid escalation in tensions pushed the US-China trade war into uncharted territory, the dollar index against its main rivals also remained on the backfoot.

On Monday, China let the onshore yuan break through the key 7 per US dollar level for the first time since the global financial crisis, sending global financial markets into a tailspin, and investors are closely watching to see how much more Beijing will allow it to fall.

China said early on Tuesday it was selling yuan-denominated bills in Hong Kong, in a move seen as curtailing short selling of the currency.

It also set a daily mid-point for onshore trade that was slightly firmer than markets had expected, though it was still the weakest level since May 2008.

US Treasury Secretary Steven Mnuchin said in a statement on Monday the government had determined that China is manipulating its currency and that Washington would engage with the International Monetary Fund to eliminate unfair competition from Beijing.

Yuan's sudden drop through the 7 mark came days after President Donald Trump announced he would impose 10 per cent tariffs on US$300 billion of Chinese imports, ending a month-long trade truce.

"The recovery in yuan and the move in the yen is triggered by the fixing, which has eased some concern about competitive currency devaluation," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

"China is not really trying to dramatically weaken its currency. However, nothing has been resolved in the trade war."

The offshore yuan initially fell to 7.1265 per dollar, the lowest since international trading in the currency began in 2010, but then rallied around 0.5 per cent against the dollar to 7.0623.

The onshore yuan opened trade at 7.0699 per dollar and was last at 7.0370, versus its last close at 7.0498.

In volatile trading, the dollar initially fell versus the yen to 105.51 yen, the lowest since a flash crash in January that roiled currency markets, but then reversed course and surged by 1 per cent to 107.11 yen as 10-year Treasury yields and US stock futures turned positive.

The yen, which usually rises during times of economic stress and market turmoil due to Japan's status as the world's biggest creditor, also slumped against major crosses after the latest moves from Beijing.

The New Zealand dollar surged 1 per cent to 69.85 yen, while the Australian dollar rose 1.2 per cent to 72.42 yen.

Elsewhere, the Australian dollar rose 0.3 per cent to US$0.6778. The Aussie held onto gains after the Reserve Bank of Australia left its benchmark interest rate at a record low of 1.00 per cent, as expected.

The New Zealand dollar jumped by 0.5 per cent to US$0.6562 after New Zealand's jobless rate fell to an 11-year low, but the kiwi later erased its gains to trade flat on the day.

The Reserve Bank of New Zealand is expected to cut interest rates to a record low of 1.25 per cent on Wednesday, but strong unemployment data suggests the economic is not as bad as some had speculated.

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