CHINA SET its daily yuan reference rate at the weakest level since 2008 after the currency hit a seven-month low in onshore trading Friday amid increasing political tensions with the US.

The People’s Bank of China (PBoC) put the yuan fixing at 7.1209 per dollar. That compares with the 7.122 average estimate in a Bloomberg survey of traders and analysts. The fixing limits the onshore yuan’s moves to 2% in either direction.

While Monday’s fixing was roughly in line with expectations, it was with “marginal downward bias,” said Trang Thuy Le, macro-strategy analyst at Macquarie Bank Ltd. in Hong Kong. She added the PBoC “thinks it can manage depreciation pressure as long as there are no big, disorderly moves.”

China’s central bank will be keeping a close eye on whether the yuan will test 7.2 against the dollar soon, said Zhou Hao, an economist at Commerzbank AG in Singapore. “There would probably be more volatility on the yuan for the time being as we wait to see how Trump reacts to the Hong Kong situation,” said Zhou, referring to the US president.

Beijing’s latest move to tighten its grip on Hong Kong has set up another showdown between Donald Trump and China’s Xi Jinping. The US-China relationship has worsened dramatically in the past few months as the world’s two biggest economies have clashed on a range of issues from the coronavirus pandemic to trade and human rights.

The onshore yuan was 0.1% weaker Monday from Friday’s close in Shanghai of 7.131. The daily fixing is calculated with formulas that take into account factors such as the previous trading day’s official close at 4:30 p.m, the yuan’s move against a basket of currencies and moves of other major exchange rates.

The offshore rate, which edged toward the weakest level on record last week, was 0.26% weaker at 7.1514 per dollar as of 11:05 a.m. Monday. — Bloomberg