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The U.S. Treasury Department declared China to be manipulating its currency to gain unfair advantage in international trade late Monday, a move that will trigger formal action from Washington that could accelerate tensions between the world's two biggest economies.

Treasury Secretary Steve Mnuchin will "engage with the International Monetary Fund" to eliminate what the department said was an "unfair advantage" created by China's decision to allow its currency, the yuan, to fall bellow the $7 mark for the first time since 2008. The offshore yuan fell to a fresh 10-year low of 7.1175 against the dollar in Asia trade following the Treasury declaration.

"China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market," the Treasury said in a statement published on its website. "In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past."

"The context of these actions and the implausibility of China's market stability rationale confirm that the purpose of China's currency devaluation is to gain an unfair competitive advantage in international trade," the statement added.

U.S. equity futures extended declines following the Treasury Department statement, following on from one of the worst days of the year on Wall Street Monday, with contracts tied to the Dow Jones Industrial Average indicating another 430 point plunge at the start of trading Tuesday, and those linked to the S&P 500 suggesting a 47 point slump for the broader benchmark.  

Under rules first established in 1998, the Treasury adopted three criteria it uses to determine if a country is manipulating its currency for unfair advantage: the nation must have a trade surplus with the US of more than $20 billion, a current-account surplus of more than 3% of GDP and must buy assets worth 2% of GDP in attempting to reduce the value of its own currency on foreign exchange markets. 

China was first labelled a currency manipulator from 1992 to 1994, but has remained on a so-called 'watch list' since then even as the yuan held at a peg of 8.276 versus the dollar until 2005. The currency has since gained nearly 27% against the greenback from 2005 to 2014, when it traded at 6.06, but has weakened since then -- apart from an 18-month rally starting in 2017 -- as growth slowed and China's debt crisis took hold of the world's second-largest economy.

Earlier Monday, the People's Bank of China let the so-called on-shore yuan fall past the psychologically important threshold of $7 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 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.

President Donald Trump called the move a "major violation" that should warrant reaction from the Federal Reserve to respond, presumably with lower interest rates that would weaken the dollar.

The CME Group's FedWatch tool, which assigns rate change probability, is pricing in an 62.5% chance of a 25 basis point September cut, up from just 54.8% last week, and 37.3% chance of a 50 basis point move, up from merely 2% last week. There's also a 92% chance of a further reduction between now and the end of the year.