TORONTO — A surprise move by China to devaluate its currency sent North American markets into a tailspin Tuesday, with both Toronto and New York recording triple-digit losses that virtually wiped out the gains of the previous session.
The decision to devalue the Chinese yuan by some two per cent stoked fears among investors worldwide that the world's most populous country may be in the midst of an economic slump that's worse than official government estimates.
The announcement by China, the world's second-largest consumer of oil, also sent crude prices tumbling Tuesday, as questions were raised over just how much demand there really is for oil. The price of U.S. crude oil has tumbled to its lowest level in more than six years. Benchmark U.S. crude fell $1.88, or 4 per cent, to settle at $43.08 a barrel in New York on Tuesday, its lowest close since March of 2009.
The latest slide came as OPEC said its production rose to a three-year high.
The Canadian dollar, like other commodity-based currencies, was also a casualty of the overnight announcement by China's central bank to devalue the yuan, with the loonie tumbling 0.75 of a U.S. cent to 76.17 cents.
In Toronto, the S&P/TSX composite index was down 163.22 points at 14,303.17 at mid-afternoon, erasing Monday's 163.69-point gain.
In New York, the Dow Jones industrial average plunged 241.19 points to 17,373.98, reversing Monday's 241.79-point advance, while the Nasdaq dropped 81.73 points to 5,020.07 and the S&P 500 fell 25.22 points to 2,078.96.
The declines came as currency, equity and commodity markets around the world responded to the latest move by Beijing aimed at boosting China's lagging economy and exports.
China's surprise move Tuesday to devalue its currency has intensified concerns about a slowdown in the world's second-largest economy, whose growth rate has reached a six-year low. It is also fanning political tensions with the United States and Europe, whose exports could become comparatively costlier.
China's central bank said the devaluation of the yuan was a result of reforms intended to make its exchange rate more market-based. The yuan is linked to the dollar's value, which has jumped in the past year.
Chinese officials say Tuesday's move will mean the yuan will partly reflect market fluctuations while still remaining linked to the dollar.
A tight peg between the dollar and the yuan has hurt Chinese exporters by keeping their goods expensive overseas, thereby threatening jobs in key manufacturing industries. Exports in July plummeted by an unexpectedly steep 8.3 per cent from a year earlier. A cheaper yuan will lower the prices of China's exports.
"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.
China's economic growth has slowed to an annual rate of just 7 per cent _ healthy for most countries but far below the double-digit pace it has enjoyed for decades. The country's leaders fear that growth below that pace will raise the unemployment rate and possibly lead to social unrest.
Still, China's action Tuesday sparked complaints in Washington, where members of Congress have long complained that Beijing manipulates its currency to gain a trade advantage.
"For years, China has rigged the rules and played games with its currency,'' said Sen. Chuck Schumer, a New York Democrat. "Rather than changing their ways, the Chinese government seems to be doubling down.''
The Treasury Department's response was more measured.
"While it is too early to judge the full implications of the change... China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,'' a department statement said.
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.
— With files from The Huffington Post Canada and The Associated Press
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