China came forward to ease the nascent currency war with the United States, which resulted in the rose of Dow futures. The Dow (INDU) closed at 312 points, or 1.2%, whereas the S&P 500 (SPX) finished up 1.3% higher. The tech-heavy Nasdaq Composite (COMP), the worst hit in Monday’s selloff, finished up 1.4%. In seven days, it was first positive performance for the Nasdaq and the S&P. After the initiative by Chinese government officials to prevent its currency from dropping too much, markets improved from a dreadful day on Monday.
China priced the reference rate of yuan at 6.9683 to the dollar. The reference rate was above the target ratio of 7:1 to the US dollar. But that was the weakest level in 11 years for yuan. Wall Street investors were afraid that china might price the yuan under that self- induced 7:1 barrier. The yuan continued to drop on Tuesday, but the speed of its falling slowed down. It was 7.0235 yuan to the dollar in China, while in the offshore market it was 7.0530 yuan. The currency trades more freely in both the market. Stock investors relieved after the central Bank of China declared plans to offer central bank bills valuing 30 billion yuan in next week. The declaration upheld China’s currency and slightly rose up against the dollar.
When the United States categorized China as a currency manipulator, the market condition got worse. But now the markets are recovering. Investors were afraid that the label might lose China’s incentive to reduce the yuan value against the dollar, which would set off a currency war between China and the United States. If the Chinese currency drops any further, the burden of tariffs on China from America might ease. Wall Street investors fear a purposeful devaluation of yuan could intensify the trade war. This intentional devaluation might prompt the United States to increase tariffs on China or intrude in US dollar value.