China's central bank Tuesday devalued its yuan currency by nearly two percent against the U.S. dollar, in a surprise move widely seen as the latest measure to prop up its slowing economy.
The move by the People's Bank of China (PBoC) triggered the yuan's biggest slide in a decade, prompting other currencies in Asia, including South Korea and Australia, to weaken.
The Chinese central bank set its daily reference rate for the yuan at 6.2298 to US$1 on Tuesday, compared with 6.1162 yuan on Monday. That means the yuan weakens against the U.S. dollar by 1.86 percent.
The PBoC also changed its method of deciding the trading band of the yuan and said it is now decided on the previous day's closing price and other factors.
Citing a strong U.S. dollar and weakening euro and Japanese yen currencies, the PBoC said it is "good time" for the yuan, also known as the renminbi (RMB), to cheapen against the U.S. dollar.
"The U.S. dollar is strengthening, while the euro and Japanese yen are weakening. Emerging market and commodities currencies are facing downward pressure, and we are seeing increasing volatilities in international capital flow," it said.
"This complex situation is posing new challenges," the Chinese central bank said in a statement. "Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development."
A weakening yuan helps boost Chinese exports by making the country's products more competitive overseas.
China targets this year's economic growth rate at seven percent, marking the slowest expansion in 25 years.
While the PBoC said Tuesday's devaluation of about 2 percent is a one-time event, it opened the possibility of letting the yuan weaken further.
"The market will play a bigger role in exchange rate determination to facilitate the balancing of international payments," it said.
China is South Korea's No. 1 exports market. The South Korean won currency declined to a 38-month low of 1,179.1 won against the U.S. dollar.
The Korean currency also closed at 185.2 won against the yuan on Tuesday, down 1.9 won from the previous day.