China’s bold move Tuesday to sharply devalue its currency could squeeze exporters around the world whose goods are likely to become costlier versus Chinese products.
The action has also intensified fears about the weakening of the world’s second largest economy, whose growth rate has reached a six-year low as its exports have steadily dwindled.
A cheaper yuan will benefit China’s products by making them less expensive overseas. Yet those gains could come at the expense of manufacturers in other countries, including the United States and Europe. U.S. exporters have long complained that China manipulates its currency to gain a trade advantage. Some members of Congress have backed legislation to impose retaliatory tariffs.
China’s currency move also set off a sharp selloff in global financial markets. Oil, copper and other commodity prices fell as traders anticipated weaker demand from China. That led to big drops in energy and material stocks. Companies that derive a large part of their sales from China, such as Apple and Yum Brands, also fell sharply.
“China is the second largest economy in the world, and they are certainly going through a stage right now where growth is not as robust as it has been,” said Michael Scanlon, a managing director at John Hancock Asset Management. “China is one of the biggest risks to the equity market as a whole.”
The Standard & Poor’s 500 index fell 20.11, or 1 percent, to 2,084.07. The Dow Jones industrial average fell 212.33, or 1.2 percent, to 17,402.84. The Nasdaq composite index fell 65.01, or 1.3 percent, to 5,036.79.
Yum Brands, the owner of the KFC and Taco Bell chains, was among the biggest decliners in the S&P 500. The fast-food company gets more than half of its sales from China. The company said last month that it was expecting a strong second half of the year in China. Yum fell $4.28, or 4.9 percent, to $83.54.
Apple, another company that makes a lot of money in China, dropped $6.23, or 5.2 percent, to $113.49. Wynn Resorts, which generates more than half of its revenue from the Chinese gambling hub of Macau, slipped $2.39, or 4.3 percent, to $54.36.
The price of oil had another big drop, closing at its lowest level in six years. Oil prices also fell after OPEC said its production increased to a three-year high, adding further evidence of a global supply glut. U.S. crude fell $1.88 to $43.08 a barrel in New York, its lowest close since March 2009.
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 such as Australia and Brazil.
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 increase would 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.
The rising dollar has hurt U.S. exporters by making their goods costlier abroad, and China’s move to devalue its currency could further complicate the Fed’s decision on when to raise rates. By making Chinese goods comparatively cheaper in the United States, a lower-valued yuan would contribute further to already low U.S. inflation.
The Fed wants to be “reasonably confident” that inflation is returning to its 2 percent target before raising rates. Yet inflation has risen just 1.3 percent in the past 12 months.
Michael Feroli, an economist at JPMorgan Chase, suggested that the dollar’s rise poses a concern for some Fed officials, known as doves, who have been reluctant to raise rates. Should the U.S. economy stumble in the coming weeks, “dollar strength would only further embolden the doves at the next meeting,” Feroli said.