Markets have been turbulent and confidence spooked since Mr Trump announced his plan to impose a 10 percent tariff on $300 billion worth in Chinese imports last week effective from September 1, ending a month-long trade truce. Trump lashed out Monday, accusing China of using currency manipulation to "steal our business and factories, hurt our jobs, depress our workers' wages and harm our farmers' prices". China also responded by suspending its already limited purchases of USA agricultural products.
However, the U.S. Treasury's decision to designate China a currency manipulator is more about sending a message, and if anything, the yuan would've been even weaker without policy support, according to Capital Economics Senior China Economist Julian Evans-Pritchard.
Across the Atlantic, the Dow Jones Industrial Average plunged by more than 900 points as the panic spread to Wall Street in the worst day for United States stocks this year.
Steven Mnuchin, the United States treasury secretary, accused China of devaluing its currency "to gain unfair competitive advantage in worldwide trade".
Again, China invites these sorts of accusations because it has a fixed exchange rate, and in the past it has reduced the value of the yuan to promote its exports.
Before Trump sprang his trade war on China in June 2018, China was the largest importer of USA soybeans.
In energy markets, which often reflect expectations of global economic growth, the benchmark US crude rose 55 cents on Tuesday to $55.248 per barrel in electronic trading on the New York Mercantile Exchange while Brent crude, used to price worldwide oils, gained 35 cents to $60.17 per barrel in London.
The offshore yuan fell as low as 7.1397 per dollar in early Asian trade on Tuesday before clawing back most of the losses after China's central bank said it was selling yuan-denominated bills in Hong Kong, in a move seen as curtailing short selling of the currency.
The escalation of the trade war, sparked by fresh USA tariff threats, is seen to have prompted the policy shift.
The latest US move came less than three weeks after the International Monetary Fund (IMF) said the yuan's value was in line with China's economic fundamentals, while the USA dollar was overvalued by 6% to 12%. The FTSE 100 closed the day down by about 52 points at 7,172.
China's central bank said on Tuesday that Washington's currency move would "severely damage worldwide financial order and cause chaos in financial markets", while preventing a global economic recovery.
The People's Bank of China (PBOC) has insisted the value of its currency is determined by the market, though traders say it had been supporting the currency when it threatened to breach the key level over the past year.
Kudlow said movement toward an agreement could change the outlook for USA tariffs, adding, "It takes two to tango". The Dow Jones Industrial Average fell 767 points, or 2.9%. "No trade war in history has never been good for anybody".
At the time, China and the George W. Bush administration were already engaged in bilateral talks on currency and other broad trade and economic reform issues called the Strategic Economic Dialogue.
As the trade war further escalated to a currency war, the U.S. Treasury's next steps either have to involve direct negotiations with China or indirect negotiations through the International Monetary Fund (IMF).