China Devalues Yuan For The Second Day Raising Fears Of A Currency War

China has devalued Yuan for the second consecutive day. China’s currency has fallen 3.5% against the dollar in the past two days, setting the currency up for its largest two-day decline in decades. This sudden devaluation of Yuan is making US Dollar strong even more. Already the FED is worried is that US Dollar is getting strong. The more US Dollar gets strong, the more it hurts the US economy. So have we started a currency war?

China’s 2 percent devaluation of the yuan hit global equities and U.S. oil prices on Tuesday with investors fearing a new currency war as well as declining Chinese economic momentum.

Wall Street ended lower as investors contemplated the implications of a move designed to support China’s slowing economy and exports. The MSCI All World Index of global shares fell 1 percent.

“What is good for growth in China is unfortunately bad for everybody else,” said Bill McQuaker, co-head of the multi-asset team at Henderson Global Investors.

China is making the excuse that it is devaluing its currency just to make it more competitive and bring it closer to its real value. China’s yuan led the biggest two-day selloff in Asian currencies since 2008, fueling concern that financial-market volatility will curb global economic growth. Stocks fell around the world, while Treasuries rose with gold.

This can only kindle a currency war when everyone engaging in beggar thy neighbor policies. Yesterday Chinese Central Bank had announced that this devaluation was a one time affair. But then on the very next day it devalued Yuan even more. The Chinese currency has often been in news for various reasons. One of the most debated issues has been China’s mercantilist policy of artificial undervaluation of its currency against the US dollar to give its exports an “unfair” price advantage.

China is now doing the same thing in an indirect manner. We will have to see how the others react and does this start a currency war.

 

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