The tit-for-tat U.S.-China tariff battle is likely to escalate to a currency war, as many financial market participants have begun to believe Beijing may have started to push down the country's currency intentionally to boost exports.

Some traders have become worried that the U.S. administration of President Donald Trump could intervene in the foreign exchange market to stem the appreciation of the dollar against the yuan in a bid to counter China's alleged currency manipulation.

With strains between the world's two largest economies showing few signs of easing, the global foreign exchange market is certain to continue being reactive to any remarks and moves by the United States and China for the time being, traders said.

Analysts, meanwhile, say Japan -- whose currency has been widely viewed as a safe-haven asset for the past decade -- would end up embroiled in the intensifying U.S.-China trade and market disputes amid growing anxiety about a downturn in the world economy.

"We cannot predict what Trump will do next," said Masanobu Ishikawa, general manager at Tokyo Forex & Ueda Harlow, a foreign exchange brokerage. "What we can say now is confusion in the currency market is set to last for a while, and Japan would suffer from it."

On Monday, the Chinese yuan plummeted to an 11-year low, breaching the psychologically important level of 7 yuan to the U.S. dollar. At first, the depreciation was triggered by mounting concern over the outlook for the world's second-biggest economy.


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Later in the day, however, Trump lambasted Beijing for guiding the yuan -- also known as the renminbi -- to "an almost a historic low," saying in his Twitter post, "It's called currency manipulation."

The U.S. Treasury Department also announced on the same day that it has designated China as "a currency manipulator" for the first time in 25 years.

But seemingly unfazed by the criticism, the People's Bank of China, the nation's central bank, on Tuesday set the weakest yuan reference rate against the dollar since May 2008.

As China's exports, a key engine of economic expansion, have been slowing down due largely to tariffs imposed by the United States, Beijing might have decided to take steps to devalue the country's currency, pundits say.

A weaker yuan usually bolsters exports by making Chinese firms' products cheaper in other nations while driving up the value of overseas revenue in yuan terms.

Junichi Makino, chief economist at SMBC Nikko Securities Inc., said, "If China is trying to mitigate the pain of the trade war by a currency devaluation, the trade war may convert to a currency war."

Beijing's action is clearly against a U.S. request to curb China's massive trade surplus, or exports minus imports, which would prompt Trump to implement retaliatory measures as he has been eager to pitch his achievements for his 2020 re-election campaign.

"The possibility cannot be ruled out that Trump will intervene in the currency market to lower the value of the dollar," a foreign exchange dealer said on the condition of anonymity.

The United States has not stepped into the currency market since 2011, when the Group of Seven advanced economies carried out a joint intervention to help stabilize the yen following the devastating earthquake in Japan, and avoid potential fallout on global financial markets.

Trump has repeatedly expressed dissatisfaction with the dollar's rise, backed by a recovery in the U.S. economy. He has put pressure on the Federal Reserve to cut interest rates, which should prod investors to reduce their dollar holdings.

Ishikawa said there is little chance for Washington to attempt to control the foreign exchange rate as it has urged Beijing to stop doing so, but he added, "I can't say 'absolutely not.' Trump may do whatever he can to challenge China."

If fears about a currency war are rife in the foreign exchange market, Japan, whose economy has also been dependent on exports, would become the "most visible victim," Ishikawa said.

Makino echoed the view, saying the Japanese yen has extended its gains as many traders have been selling riskier assets, including stocks, and flocking to safer bets as the outlook for the global economy gets gloomier.

On Tuesday, the yen gave up some gains, but the currency hit a seven-month high in the upper 105 yen range against the dollar the previous day.

A rising yen would depress import prices, making it more difficult for Japanese Prime Minister Shinzo Abe to attain his signature goal of beating decades-long deflation and for the Bank of Japan to meet its 2 percent inflation target.

Japan's core consumer prices, excluding volatile fresh food prices, edged up 0.6 percent from a year earlier in June, but the pace of growth was the slowest in nearly two years on falling oil prices, the latest government data showed.

Under such circumstances, there is speculation that the Japanese central bank will loosen its monetary grip further to stimulate the economy and curtail the yen's advance.

Nonetheless, Abe has pledged to lift the consumption tax by two percentage points to 10 percent in October to help restore Japan's fiscal health, the worst among major industrialized economies, raising expectations that private spending and investment would shrink.

If the world's third-biggest economy faces downward pressure, share prices would fall, which could accelerate demand for the safe-haven yen, economists say.

"Unfortunately, it doesn't seem easy for Japan to weather hard times," Ishikawa said.