China’s surprise decision to devalue its currency is turning up the heat on the rest of Asia.
The yuan has fallen roughly 3.5% over the past two days following a move by the People’s Bank of China to allow market forces to play a bigger role in currency markets.
As the devaluation deepens, much of Asia is going to feel pressure to slash exchange rates, particularly countries that rely on exports to China, or ones that compete against China in global markets to export smartphones, consumer electronics and other goods.
Countries will “seek weaker exchange rates in order to keep their own export sector competitive,” said Lindsey Piegza, an economist at Stifel Nicolaus & Co.
The fear is that Asia could find itself engulfed in an all-out currency spat.
“The spectre of currency wars was worrying enough yesterday, but today it looks real enough to touch,” said Chris Beauchamp, a senior market analyst at IG Group. “A single move might have passed without reaction from China’s trading partners, but now it looks like a tit-for-tat move by others in the region is certain.”