SHANGHAI: The yuan gave up early gains and weakened against the US dollar on Monday after Bloomberg News reported China is evaluating the potential impact of a gradual yuan depreciation as a tool in the escalating trade dispute with the United States.
The report, which cited unidentified sources familiar with the matter, triggered a sudden sell-off in the Chinese currency in afternoon trade.
While both Washington and Beijing have ramped up tit-for-tat trade threats in recent weeks, traders had believed there was a low risk of China changing its currency policy in the near term, which could further roil global financial markets.
Tommy Xie, an economist at OCBC Bank in Singapore, said yuan depreciation might be the most acceptable option available for the Chinese authorities now as it could be "a bridging tactic".
"If the market believes yuan depreciation is an option, the self induction process may lead to a weaker yuan, which (would) actually help China in negotiation process," Xie said.
"But the magnitude is tricky. China has spent almost $1 trillion (of its reserves) in the past three years to contain outflow risk."
In the spot market, the yuan opened at 6.3005 per dollar, eased to a low of 6.3566 per dollar at one point in afternoon trade -- the weakest intraday level since March 9.
By the closing bell, the onshore spot yuan settled at 6.3107 per dollar.
If the yuan ends the late night session at its domestic close, it would have lost 0.13 percent to the dollar for the day.
The offshore yuan was also on the weakening trend, falling to a low of 6.3260. It was traded at 6.3110 as of 0830 GMT.
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