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Asian Markets Suffer Steep Losses Amid Escalating US-China Trade War

A currency trader watches the computer monitors near the screens showing KOSPI, left, and the foreign exchange rate between the U.S. dollar and South Korean won at the foreign exchange dealing room in Seoul, South Korea, Aug. 6, 2019.

Updated at 10:45 a.m.

The escalating trade tensions between the United States and China that sent U.S. stock prices plunging Monday continued to reverberate around the globe as Asian stock prices sustained huge losses Tuesday.

Japan's benchmark Nikkei index lost nearly 135 points to close out the day's trading session, while China's Shanghai index dropped nearly 40 points, a loss of just over 1%. Australia's index fell 162 points, well over 2%. Hong Kong's Hang Seng index lost 175 points at Tuesday's finish, a loss of more than one-half of 1%.

Tuesday's sell-offs in Asia came hours after Wall Street posted its worst losses of the year, with the S&P 500 index losing 3% on Monday, while the tech-heavy Nasdaq dropped 3.5% and the Dow Jones fell nearly 3%. The selloff was triggered by Beijing's decision to allow its currency to weaken to its lowest point in 11 years, triggering an angry response by U.S. President Donald Trump on Twitter, accusing China of manipulating its currency.

The outlook was far different in Europe on Tuesday, with the benchmark index in London off slightly, while those in Paris and Frankfurt were trading in positive territory by mid-day after China took steps to stabilize its currency.

The months-long trade war between the United States and China, the world's two biggest economies, worsened last week as Trump announced plans, starting Sept. 1, to impose a 10% tariff on $300 billion worth of Chinese exports to the U.S. China retaliated by ending all new purchases of agricultural products from the U.S.

Tuesday, on Twitter, Trump said, "Massive amounts of money from China and other parts of the world is pouring into the United States for reasons of safety, investment, and interest rates! We are in a very strong position. Companies are also coming to the U.S. in big numbers. A beautiful thing to watch!"

As China curbed its American agricultural purchases over the last year, Trump directed billions of dollars of U.S. government aid to farmers to cover their lost revenue and says he would do it again.

"As they have learned in the last two years," Trump tweeted Tuesday, "our great American Farmers know that China will not be able to hurt them in that their President has stood with them and done what no other president would do - And I'll do it again next year if necessary!"

China's move to devalue its currency gives its exporters a price edge in world markets.

Hours after Beijing devalued the yuan Monday, the U.S. Treasury Department officially designated China a currency manipulator. China's central bank, the People's Bank of China, issued a statement early Tuesday describing Washington's decision as "wayward unilateralism" that "seriously undermines international rules and will have a major impact on global economic finance."

The Central Bank said the yuan exchange rate "is driven and determined by market forces." It said Beijing has not used the exchange rate as a tool to deal with trade disputes.

The yuan is not freely convertible and the Chinese government typically limits its movement against the U.S. dollar to a 2% range on either side of a central parity rate that the central bank sets each day to reflect market trends and control volatility. On Tuesday, the midpoint rate was set at 6.97.

Former Assistant Deputy Secretary of Treasury on International Economic Studies Brad Setser say trade tensions between the two countries can escalate even further.

"While China has reduced imports of particularly commodities in the United States, it hasn’t stopped importing all the U.S. goods; it hasn’t directly threatened the interest of the U.S. companies in China," said the Council on Foreign Relations senior fellow. "[And] The U.S could raise the rates even higher, could go from 10% from 300 billion.”