China has allowed the embattled yuan to fall below RMB7.00 to the dollar on Monday, the first time the yuan has broken below this psychological barrier since May 9, 2008.
The yuan depreciated 1.4 percent versus the dollar.
The depreciation of the yuan announced by the People's Bank of China (PBOC) is certain to be received with hostility by the Trump administration, which has long and loudly accused China of deliberately weakening the yuan to give it a huge trade edge over the U.S.
The PBOC announcement comes only three days after U.S. president Donald Trump announced a new set of 10 percent tariffs on $300 billion of Chinese goods to the U.S. effective Sept. 1. This new tariff rate is in addition to the 25 percent tariff imposed on $250 billion worth of goods last May.
PBOC set the yuan's daily midpoint at RMB6.9225 to $1.00 before the market open. This was the yuan's weakest level since Dec. 3, 2018.
The onshore yuan finished Monday's domestic session at RMB7.0352 to $1.00, its weakest level since March 2008. Monday was the first time the yuan had crashed through the RMB7.00 to $1.00 level since May 9, 2008.
"Under the influence of factors including unilateralism, protectionist trade measures, and expectations of tariffs against China, the yuan has depreciated against the dollar today, breaking through 7 yuan per dollar," said the PBOC.
Financial analysts are now warning the yuan''s fall might unleash a new and more painful front in Trump's trade war against China. Some believe PBOC had hheld back for months against allowing a weaker yuan to avoid derailing trade negotiations with Trump administration.
These talks, however, have proved fruitless in the face of the Trump administration's stubborn insistence China cave-in to its demands China make painful structural changes to its economy.
"The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the U.S.," said Julian Evans-Pritchard, Senior China Economist of Capital Economics.
Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said setting the yuan's daily midpoint at RMB6.9225 to $1.00 "was the last line in the sand. The PBOC has fully given the green light to yuan depreciation."
Analysts said they expect the yuan to continue to weaken as long as Trump's trade war remains unresolved. They also believe the yuan's strength in the short-term will be largely determined by the state of the domestic economy.
