NEW YORK (Reuters) - The yuan suffered its biggest one-day decline in more than two decades on Tuesday, hitting a three-year low after the Chinese central bank surprised markets by devaluing it by almost 2 percent, firing a broadside in what some analysts saw as a looming currency war.
The bank described the move as a “one-off depreciation” and billed it as free-market reform, but, after a run of weak Chinese data, with exports tumbling more than 8 percent in July, many economists said it was aimed at boosting the competitiveness of the world’s second-biggest economy.
“It was a very significant move that they did, obviously completely unexpected,” said Jason Leinwand, managing director at Riverside Risk Advisors in New York. “The fear in the market is that the PBOC did this because they were concerned that Chinese growth is going to weaken too much.”
The yuan midpoint was set at 6.2298 per U.S. dollar, compared with the 6.1162 midpoint on Monday. The central bank said it would now base the yuan’s midpoint on market-makers’ quotes and the previous day’s closing price.
Spot yuan CNY=CFXS tumbled around 2 percent to as low as 6.3391, the weakest since September 2012 and the biggest drop since the currency was officially devalued in 1994.
The yuan extended losses in the offshore market, hitting its weakest in over 3-1/2 years CNH= at 6.4212, with traders saying that would mean more losses were in store for the onshore currency.
The euro hit its highest against the dollar in a week and a half, at $1.10890, before paring gains. Some analysts said the strength of the dollar against the yuan and the New Zealand and Australian dollars in the wake of the devaluation move could influence the Federal Reserve’s timeline for hiking interest rates or the pace at which they hike.
That uncertainty helped the euro gain against the dollar.
“The market is including the possibility that rates in the U.S. may rise at a lower rate down the road, and that’s why the dollar is weakening versus the euro,” said Jorge Mariscal, chief investment officer of emerging markets at UBS Wealth Management in New York.
The dollar index, which measures the greenback against a basket of six major currencies, was last up 0.09 percent at 97.244 .DXY. The euro was last up 0.21 percent against the greenback at $1.10415. The dollar was up 0.37 percent against the Japanese yen at 125.105 yen JPY=EBS.
Reporting by Sam Forgione; Additional reporting by Jemima Kelly in London; Editing by Jonathan Oatis and James Dalgleish