The US has officially named China as a “currency manipulator”, a statement which will intensify tensions between the world’s two largest economies.
The announcement by the US Treasury follows a sharp fall in the value of the Chinese yuan against the dollar.
The drop caught markets off-guard as Beijing usually supports the currency.
Last week, China pledged to retaliate after US President Donald Trump vowed to impose 10% tariffs on $300bn (£246.7bn) of Chinese imports.
On Monday, the yuan passed the seven-per-dollar level for the first time since 2008, prompting Mr Trump to accuse China on Twitter of manipulating its currency.
The US Treasury department defines currency manipulation as when countries deliberately influence the exchange rate between their currency and the US dollar to gain “unfair competitive advantage in international trade”.
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies.
On Monday, the People’s Bank of China (PBOC) said the slump in the yuan was driven by “unilateralism and trade protectionism measures and the imposition of tariff increases on China”.
The US government said Treasury Secretary Steven Mnuchin will now engage with the International Monetary Fund (IMF) “to eliminate the unfair competitive advantage created by China’s latest actions”.
However, it fulfils a presidential campaign promise by Mr Trump who pledged to name China a currency manipulator on his first day in office.
The decision rattled investors, with Wall Street’s main stock market indexes recording their worst trading day for 2019. Asia markets extended losses on Tuesday, with the Shanghai Composite down 1.3% in afternoon trading.