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The U.S. Treasury Department labeled China a currency manipulator Monday, Aug. 5, after Beijing pushed down the value of its yuan in a dramatic escalation of the trade conflict between the world's two biggest economies.

The Associated Press

China’s yuan fell further Tuesday against the U.S. dollar, fueling fears about increasing global damage from Beijing’s trade war with President Donald Trump.

The yuan declined to 7.0562 to the dollar before strengthening to 7.0388 at midday. That came a day after Beijing sent global financial markets tumbling by allowing the currency to fall past the politically sensitive level of seven to the dollar for the first time since the 2008 financial crisis.

The Trump administration responded Monday by officially declaring China improperly manipulates the yuan’s value. That opens the way to possible new penalties.

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“The latest U.S. move will likely harden China’s position in trade negotiations,” said Tao Wang of UBS in a report.

China’s central bank says the declines are driven by market forces. But they fueled fears Beijing might use devaluation as a weapon in its increasingly costly fight with Trump over China’s trade surplus and technology policies.

Trump rattled investors with last week’s surprise announcement of punitive tariffs on an additional $300-billion of Chinese imports, effective Sept. 1. That came after a round of talks on resolving their tariff war ended in Shanghai with no indication of a deal.

American officials complain a weak yuan — also known as the renminbi, or “people’s money” — makes China’s export prices unfairly low, hurting foreign competitors and swelling Beijing’s trade surplus.

Washington’s latest moves “could be seen as further evidence that the U.S. administration may not really want to reach a trade deal soon,” said Wang. “We believe there is an increasing risk to a delay or cancellation of the planned trade talks.”

The Chinese central bank governor, Yi Gang, tried to reassure investors, promising in a statement issued late Monday that Beijing will stick to commitments “not to use exchange rates for competitive purposes.”

The People’s Bank of China is “committed to maintaining the basic stability” of the yuan “at a reasonable and balanced level,” said Yi’s statement.

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The central bank sets the exchange rate each morning and allows the yuan to fluctuate by 2 per cent against the dollar during the day. The central bank can buy or sell currency — or order commercial banks to do so — to dampen price movements.

On Tuesday, the yuan’s starting exchange rate was set at 6.9683. That would allow the currency to weaken to as much as 7.100 while staying within the 2 per cent trading band.

The dollar’s unexpected strength against the yuan could have global repercussions, according to Nick Wall of Merian Global Investors. He said many foreign borrowers need to repay debts in dollars that might be harder to obtain.

“The risks of a further dollar squeeze and more foreign exchange volatility are now quite high,” said Wall in a report.

Chinese leaders have promised to avoid “competitive devaluation” to boost exports by making them less expensive abroad. But regulators are trying to make the state-controlled exchange rate more responsive to market forces, which are pushing the yuan lower.

Trump’s tariff hikes have put downward pressure on the yuan by fueling fears economic growth might weaken.

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The yuan has lost 5 per cent against the dollar since hitting a high in February of 6.6862 to the dollar.

That helps exporters cope with tariffs of up to 25 per cent imposed by Trump on billions of dollars of Chinese goods. But it raises the risk of inflaming American complaints.

A weaker yuan also might disrupt Chinese efforts to shore up cooling economic growth. It would raise borrowing costs by encouraging an outflow of capital from the world’s second-largest economy.

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