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China's yuan devaluation rattles forex market

Wednesday, August 12, 2015 - 06:43
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China's unexpected sharp currency devaluation Tuesday shook the foreign-exchange market, boosting the dollar and stirring concerns about a delay in the Federal Reserve's plan to raise interest rates.

[NEW YORK] China's unexpected sharp currency devaluation Tuesday shook the foreign-exchange market, boosting the dollar and stirring concerns about a delay in the Federal Reserve's plan to raise interest rates.

China's central bank devalued its yuan currency Tuesday by nearly two per cent against the US dollar, as authorities said they were seeking to push market reforms in a one-time move.

The dollar strengthened against most major rivals except for the euro, which rose slightly against the greenback, gaining a lift from Greece's agreement with its creditors for a third bailout.

The People's Bank of China (PBoC) said Tuesday it would now base the fixing on the previous day's close and other factors, a new method of calculating the daily price. Previously the central bank would allow the yuan, also known as the renminbi, to vary by up to two percent of the central rate.

The dramatic move surprised markets and led to a wave of selling on US and European equity bourses, as well as across many commodity exchanges.

The PBoC's decision to loosen the dollar-yuan trading band "will have far-reaching implications," said Christopher Vecchio, currency analyst at DailyFX.

"Look no further than the fact that the PBoC released an explanation of its monetary policy decision in English: the PBoC is well-aware the world is watching Chinese economic and financial markets, and is doing all that it can to maintain control over a spiraling situation." Forex.com analyst Fawad Razaqzada said that "the market has interpreted the move as a sign that the health of the Chinese economy is probably worse than even what the official data suggests." Analysts wondered about the devaluation's impact on the timing of the Fed plan to raise its near-zero federal funds rate this year, dependent on whether the economy is strong enough to withstand a rate hike.

"China's currency move laid down another potential obstacle to an imminent Fed rate hike. Not everyone is on board with the notion the Fed would boost rates at its coming meeting in mid-September, with (the) economy continuing to flash mixed signals," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

AFP