President Donald Trump said Monday that China's move to allow its currency to trade at a decade low against the U.S. dollar is a "major violation" that should warrant reaction from the Federal Reserve.

Trump said the move, which saw the yuan fall below the 7 mark against the U.S. dollar for the first time since May of 2008, was "currency manipulation", but didn't label China as a direct currency manipulator. Instead, he called upon the Fed, and not the U.S. Treasury, to respond, presumably with lower interest rates that would weaken the dollar.

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, including the yuan, was marked 0.5% lower on the session at $97.54, and more than 1.39% lower than the two-year high the index reached following the Fed's rate decision last week.

The CME Group's FedWatch tool, which assigns rate change probability, is pricing in an 76.5% chance of a 25 basis point September cut, up from just 54.8% last week, and 23.5% chance of a 50 basis point move, up from merely 2% last week. There's also an 85% chance of a further reduction between now and the end of the year.

The People's Bank of China let the so-called on-shore yuan fall past the psychologically important threshold of 7 against the greenback in early Monday trading, citing in a statement "unilateralism and protectionism", as well as the expectation of additional tariffs from the United States. The breach through 7, the first since May 2008, weakens the Chinese currency in international markets and theoretically makes exports more attractive by off-setting the impact of tariffs.

"Affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China, the (yuan) has depreciated against the US dollar today, breaking through 7 yuan, but the renminbi continues to be stable and strong against a basket of currencies," the PBOC said in a translated statement.

The yuan weakening had an immediate impact on risk markets all over the world, with gold rising to a seven-year high of $1,468.40 per ounce and 10-year U.S. Treasury note yields falling to a three-year low of 1.745%.

The CME Group's FedWatch tool, which assigns rate change probability, is pricing in an 76.5% chance of a 25 basis point September cut, up from just 54.8% last week, and 23.5% chance of a 50 basis point move, up from merely 2% last week. There's also an 85% chance of a further reduction between now and the end of the year.

The move to weaponize the yuan by allowing it to fall below the 7 mark, despite repeated threats from President Trump, could also ignite concerns of currency intervention by the Treasury, under instruction from the White House, according to Saxo Bank's head strategist John Hardy.

"This latest response from China to Trump's trade tariff threat accelerates the path to a major intervention into the level of the US dollar from the Trump administration," he said. "So the "USD as safe haven" may have limited legs against risky currencies. Headline (and Tweet-) risk is high."