China's yuan fell to the lowest level against the U.S. dollar in more than a decade Monday as officials in Beijing hit back at President Donald Trump's move to apply fresh tariffs on China-made goods amid a dangerously-escalating trade war between the world's two biggest economies.

The People's Bank of China let the so-called on-shore yuan fall past the psychologically important threshold of 7.00 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 $1,457.12 per ounce and 10-year U.S. Treasury note yields falling to a three-year low of 1.765%. 

However, the move may also trigger both the broader suspension of U.S.-China trade talks, which only resumed last week after collapsing in early May, as well as the application of tariffs of 10% on $300 billion worth of -- mostly consumer focused -- China made goods on September 1.

That, according to Pantheon Macroeconomics' Ian Shepherdson, might be enough to push the Federal Reserve into another 25 basis point rate cut on September 19 "in order to avoid a market meltdown". 

"We just don't know how this is going to play out," he said. "There are too many moving parts, too many minds to read, and two unpredictable leaders to consider. We hope the tariffs on consumer goods won't happen, but we can't be confident."

The CME Group's FedWatch tool, which assigns rate change probability, is pricing in an 81.2% chance of a September cut, up from just 54.8% last week, and 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." 

White House economic adviser Larry Kudlow has repeatedly insisted that the administration has ruled out direct dollar intervention, telling Bloomberg television Friday that while the President is "concerned, correctly in my view, that other countries may be manipulating their currencies, perhaps to get some short-term trade advantage", he is also mindful that "we are the world's reserve currency, and we aim to keep it that way."

Trump, however, told reporters on July 26 that "I didn't say I'm not going to do something" when asked about currency intervention following reports he had been presented with options to weaken the dollar by trade adviser Peter Navarro.

"The dollar is very strong. The country is very strong," Trump said at the time. "It's a beautiful thing in one way but it makes it hard to compete."