Traders Gregory Rowe, left, and Daniel Kryger, center, work with specialist Mario Picone on the floor of the New York Stock Exchange, Tuesday, Aug. 6, 2019.
Traders Gregory Rowe, left, and Daniel Kryger, center, work with specialist Mario Picone on the floor of the New York Stock Exchange, Aug. 6, 2019.

U.S. stocks closed sharply higher Tuesday, rebounding from the biggest drop of the year after China stepped in to strengthen its currency.

The Dow Jones Industrial Average climbed 312 points, more than one percent. The S&P and Nasdaq were also up more than one percent while European indexes suffered losses.

U.S. indexes rebounded after Monday's steep three percent losses set off by China's decision to let the value of yuan drop to a 10 year low after President Donald Trump labeled China a currency manipulator.

Investors also fear the trade war between Washington and Beijing will get worse.

A weaker yuan means Chinese goods are cheaper on the world market compared to U.S. exports.

China's central bank issued a statement early Tuesday saying Washington's decision to label China a currency manipulator "seriously undermines international rules and will have a major impact on global economic finance."

FILE - U.S. Dollar and China Yuan notes are seen in this picture illustration, June 2, 2017.

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 sharp drop on Wall Street Monday was followed by sharp losses in Asian markets Tuesday.

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

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!"