China allowed the yuan to breach the 7-per-dollar level on Monday for the first time in more than a decade and later suspended purchases of US farm products in response to the threat of increased tariffs from US President Donald Trump.
The central bank set the yuan's daily midpoint at 6.9 per dollar before the market opened at its weakest level since December 3rd, 2018.
China's Commerce Ministry said Chinese companies have stopped buying US agricultural products, and that China will not rule out imposing import tariffs on US farm products that were bought after August 3rd.
The sharp 1.4% drop in the yuan comes days after US President Donald Trump stunned financial markets by vowing to impose 10% tariffs on the remaining $300 billion of Chinese imports from September 1st, Reuters reported.
The People's Bank of China (PBOC) provided the early impetus for yuan bears by setting a daily rate for the currency at its weakest level in eight months, weakening a long defence that kept the yuan stronger than 7 to the dollar.
PBOC Governor Yi Gang, who has been a key player in US-China trade negotiations, said in a statement posted to the bank's website that the yuan was now at an appropriate level given China's economic fundamentals. He said that China would not engage in a competitive devaluation and would maintain the stability and continuity of foreign exchange management policies.
"The fact that they have now stopped defending 7 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US," Capital Economics Senior China Economist Julian Evans-Pritchard said.