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China’s move to devalue currency could reverberate globally

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Beijing: China’s surprise move today to devalue its currency has intensified concerns about the world’s second-largest economy, whose growth has reached a six-year low. It may also fan political tensions with the United States and Europe, whose exports could become comparatively costlier.

A cheaper yuan will benefit China’s products by making them less expensive overseas. US exporters have long complained that China manipulates its currency to gain a trade advantage. Some members of the US Congress have called for imposing retaliatory tariffs.

As China’s once-breakneck growth has slowed, its reduced demand for foreign raw materials from oil to coal to copper has, in turn, slowed growth in countries like Australia and Brazil.

On Tuesday, China’s central bank said the devaluation of the yuan was a result of reforms intended to make its exchange rate more market-oriented. In recent months, the central bank has kept the yuan’s value roughly in line with the dollar, which has surged even as currencies of other developing countries have sagged.

“The move signals that (China) is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy,” said Eswar Prasad, an international economist at Cornell University. It “could intensify currency competition among the major advanced and emerging market economies that are looking to cheaper currencies to boost exports.”

China becomes the third major economy to act to lower its currency value. Initiatives by Japan and the European Union over the past two years depressed the yen and euro.

Those moves contrast with action foreseen from the Federal Reserve, which is widely expected to boost the short-term interest rate it controls later this year. A Fed rate hike would likely raise the value of the dollar, which has already jumped about 14 percent in value in the past 12 months against a basket of foreign currencies.