World stock markets plunged Monday as Beijing parried US President Donald Trump's latest tariff announcements by moving to let the China yuan currency devalue and halting purchases of US agricultural products.
The rebuttal sparked Wall Street's worst selloff of the year and also led to significant declines in leading bourses in Europe and Asia amid fears the escalation of the months-long conflict will further dim the global outlook.
After markets closed in New York, President Donald Trump fired back, formally designating China a currency manipulator.
"There is a feeling that China could inflict a lot more pain on the US in terms of the trade spat, and many traders are worried the economic conflict will rumble on for some time," said IG analyst David Madden.
China's moves came after US President Donald Trump announced plans last week to impose new tariffs on $300 billion in Chinese imports, sparking Wall Street's worst week of the year.
On Monday, the Chinese yuan fell in offshore trade to its lowest level against the dollar since August of 2010, fueling speculation that Beijing was allowing currency depreciation to counter threatened US tariffs and drawing sharp criticism from US President Donald Trump of what he called "a major violation" which would "greatly weaken China."
China's prior policy on the yuan had been to purchase foreign currencies, in part due to avoid triggering capital outflows but also as a signal to Trump, who has repeatedly complained about the strong dollar, said Louis Kujis, chief Asia economist at Oxford Economics.
"But the recent escalation of trade tensions with the US has shifted the balance of considerations in favor of a depreciation,"Kujis said.
Trump's latest tariffs "would make China less keen to achieve a deal and more determined to prepare itself for long-term economic tension with the US," Kujis said.
Later, Chinese state media reported that Chinese firms have stopped buying US farm produce. China's purchase decision means more pain for the US agricultural sector, which could hit the farm states that helped elect Trump in 2016.
- Further escalation ahead? -
Chris Krueger, a Washington strategist at Cowen, an investment bank, said of China's rebuttal, "on a scale of 1-10, it's an 11," compared with other possible measures.
The actions "seem designed for maximum political impact," he said. "We expect a quick (and possibly intemperate) response from the White House and consequently expect a more rapid escalation of trade tensions."
But other analysts noted has sometimes not gone ahead with such measures, alluding to reports that the latest tariff announcement was opposed by some key White House aides.
"Negotiations will continue to take place," said Alan Skrainka of Cornerstone Wealth Management. "What we're seeing is hardball negotiations playing out in the public eye."
While the dollar rose against the yuan, it retreated against the euro and yen as investors bet the Federal Reserve was now more likely to cut interest rates. The Fed last week cut interest rates for the first time in more than a decade, citing worries about slowing global growth in part due to the US-China trade war.
Futures markets now show investors betting on two more interest rate cuts in 2019, a shift from last week when expectations were more muted, said BK Asset Management's Kathy Lien.
She predicted the Fed would cut in September or October if Trump goes ahead with tariffs on September 1 as he has promised.
"But as we've seen on many occasions including earlier this year, anything can happen between now and then," Lien said. "If the markets fall too much, Trump could retract his threat and put the tariffs on hold."
- Key figures around 2050 GMT -
New York - Dow: DOWN 2.9 percent at 25,717.74 (close)
New York - S&P 500: DOWN 3.0 percent at 2,844.74 (close)
New York - Nasdaq: DOWN 3.5 percent at 7,726.04 (close)
London - FTSE 100: DOWN 2.5 percent at 7,223.85 (close)
Frankfurt - DAX 30: DOWN 1.8 percent at 11,658.51 (close)
Paris - CAC 40: DOWN 2.2 percent at 5,241.55 (close)
EURO STOXX 50: DOWN 1.9 percent at 3,310.93 (close)
Tokyo - Nikkei 225: DOWN 1.7 percent at 20,720.29 (close)
Hong Kong - Hang Seng: DOWN 2.9 percent at 26,151.32 (close)
Shanghai - Composite: DOWN 1.6 percent at 2,821.50 (close)
Pound/dollar: DOWN at $1.2143 from $1.2162 at 2100 GMT
Euro/pound: UP at 92.26 pence from 91.33 pence
Euro/dollar: UP at $1.1202 from $1.1108
Dollar/yen: DOWN at 105.95 yen from 106.59
Brent North Sea crude: DOWN 3.4 percent at $59.81 per barrel
West Texas Intermediate: DOWN 1.6 percent at $54.69 per barrel