Yuan tumbles as Trump threatens to hike tariffs on Chinese goods

Chinese Yuan

"Trade had been put to the side by many market participants," said Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs. "Market pricing assumed there would be some kind of a deal, and no further escalation in tariffs. And meanwhile the growth outlook was actually improving," he told Bloomberg TV.

Trump's threat now "raises the spectre of a significant hit to growth should these tariffs escalate and should the uncertainty associated with that weigh on investment going forward."

The yuan also took a hiding, shedding more than 1.3 percent at one point against the dollar, its heaviest fall in more than three years. The currency had been sitting around 10-month highs on the back of optimism the two sides would sign off on a trade pact.

"Investors will remain bearish on the yuan, as they reprice in trade war risks because the new developments are a reversal of previous positive progress," Ken Cheung, senior foreign-exchange strategist at Mizuho Bank. "The news was unexpected."

The flight to safety saw the dollar surge against higher-yielding, higher-risk units, with South Africa's rand off one percent, the Mexican peso 0.9 percent lower and the Australian dollar 0.6 percent lower.

On oil markets both main contracts were hammered more than two percent by worries that a trade war between the world's top two economies could hit demand for the commodity.

Adding to weakness in the sector is the US drive to increase output, which comes as it reports rising stockpiles, which are offsetting unrest in Libya, tensions with Iran and production caps by OPEC and Russia.

However, while trading floors are awash with red, Stephen Innes at SPI Asset Management remained positive.

"We do know the president tends to retreat from more aggressive displays, so I am viewing this thinly veiled threat as political posturing or a tactical decision to apply more pressure on China to put through a trade deal that aligns with the best USA economic interest at heart.

"Despite US-China trade talks hitting an apparent impasse based on (the) tweet, I think a deal will be signed shortly."

Trump's outburst overshadowed another blockbuster US jobs report Friday that reinforced the view that the economy is in rude health, while measured wage inflation eased pressure on the Federal Reserve to hike interest rates.