The decline of China’s yuan to its lowest level in 11 years against the U.S. dollar has led to the U.S. to designate China a “currency manipulator”. Up to now the U.S. had always refrained from slapping the designation on China. The move indicates a sharp deterioration in the trade war and in relations between the two countries. Treasury Secretary Steven Mnuchin said his agency would engage with the IMF ‘to eliminate the unfair competitive advantage created by China’s latest actions’. The Treasury Department justified its actions by citing China’s “concrete steps” in recent days to devalue its currency while maintaining substantial foreign exchange reserves. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade,” it added in a statement. China was the last country to be officially designated a currency manipulator by the administration of U.S. President Bill Clinton in 1994. The People’s Bank of China (PBOC) has denied that it devalued the yuan in response to U.S. tariffs. In a statement, PBOC Governor Yi Gang said China will “not engage in competitive devaluation, and not use the exchange rate for competitive purposes and not use the exchange rate as a tool to deal with external disturbances such as trade disputes.”

Financial markets fell from the Americas to Asia, with stock indexes plunging from Seoul to Wellington. Hong Kong’s Hang Seng Index gave back nearly all of its gains this year.

According to analysts, the yuan’s drop could continue into 2020 as the Chinese authorities are showing increasing reluctance to provide concessions to resolve the trade war with the United States. The Chinese currency’s drop has also rattled the currency market, sending 11 regional currencies lower. The break in the yuan below the key threshold of 7.0 to the U.S. dollar, analysts said, was likely to be a deliberate decision made by the People’s Bank of China (PBOC), China’s central bank, which has now decided that the currency can be part of its arsenal in fighting the trade war. It was also a reversal from Chinese policymakers’ steadfast defense of the 7.0 level in recent years, including last year in the early months of the trade war and in 2016 after the stock market rout and sharp capital outflows in 2015. U.S. President Trump hit out at the yuan’s decline, calling it “currency manipulation”. Trump’s threat to impose new tariffs on Chinese imports also sent investors scrambling for the safe-haven yen, lifting it to a 16-month high against the dollar.

Some analysts believe the PBOC will let the yuan settle at about 7.2 to the dollar in the coming months. That would represent a devaluation of about 5% compared to the yuan’s value before the start of the trade war. “Due to the effects of unilateralism and trade protectionist measures and the imposition of tariff increases on China, the yuan has depreciated against the U.S. dollar today, breaking through CNY7, but the renminbi continues to be stable and strong against a basket of currencies,” the PBOC said in the statement.

The Swiss franc, another currency widely viewed as a safe-haven, reached a two-year high against the euro, but the U.S. dollar did not benefit from the scramble for safety. “I’m looking for the yen to continue to move towards all time highs, but not seeing it through yet,” said Neil Jones, head of European hedge fund sales at Mizuho. Jones said he has seen more yen demand coming through, describing it as “a convenient hedge” against increased global risks sparked by U.S. protectionism.

The Pound Sterling also dropped, although for different reasons. Most market participants remain wary of the pound, concerned that the chances of a disorderly Brexit grew after Boris Johnson took over as Prime Minister last month and after Britain’s pro-European Union Liberal Democrats won a parliamentary seat from the governing Conservative Party, the South China Morning Post reports.

China’s “big four” state-owned banks, which together control more than USD14 trillion of assets, tumbled to record-low valuations amid mounting concern that Beijing will encourage them to bail out smaller peers. Smaller Chinese banks tracked by UBS Group need an estimated USD349 billion of fresh capital – a sum they may struggle to raise without support from big banks. The Industrial and Commercial Bank of China (ICBC) lost USD11 billion of market value in one week. Stock investors have never been so downbeat on the world’s biggest banks. The plight of smaller banks has been a major focus of investors since May, when Beijing surprised markets by seizing control of Baoshang Bank in the first government takeover of a Chinese lender in two decades. That was followed two months later by a capital injection into the Bank of Jinzhou by ICBC and two other state-owned financial firms.