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Asian stocks dropped on Tuesday as China’s central bank allowed its yuan reference rate breach a psychological barrier amid recent weakness in domestic equity markets, a change that put a strain on other emerging currencies.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3 percent to $492.84 after hitting its lowest since May last year on Monday.

As the safe-haven yen posted gains, Japan’s Nikkei slipped 1.3 percent to ¥23,502.00.

Analysts stated that risk sentiment is in a foul mood and stocks are sinking everywhere. The International Monetary Fund’s (IMF) added to that mood by downgrading forecasts of global growth for both this year and next, including reductions to the outlook for the US, China, and Europe.

Chinese equities were mixed. Hong Kong’s Hang Seng index slipped 0.1 percent to HK$26,172.91, while the Shanghai Composite added 0.1 percent to CN¥2,721.02.

Elsewhere, tech-heavy NASDAQ took a plunge for the third straight day on Monday and growth shares were pressured by worries over the possibility of rising bond yields eventually hurting the economy.

The S&P 500 shed 0.04 percent to $2,884.43 and the NASDAQ Composite declined 0.6 percent to $7,735.95, while the Dow climbed 0.1 percent to $26,486.78.

The US 10-year Treasury note last stood at 3.252 percent on Tuesday, which is its new seven-year high.

PBOC Allows Yuan to Breach 6.9000 Barrier

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The People's Bank of China (PBOC) set its yuan’s official mid-point for trading at 6.9019 per dollar on Tuesday, slipping past the 6.9000 barrier and prompting speculators to the lift the dollar to 6.9120 in the spot market.

With Chinese economic momentum continuing to weaken alongside increasing pressure from the US, currency weakness is the obvious release valve, according to analysts, saying a lurch through the psychologically important 7.0 level by year end is possible.

The slump should come as good news for exporters and did help the blue-chip CSI 300 index advanced 0.3 percent, although that came after a 4.3 percent loss on Monday which the index’s biggest daily decline since 2016. The CSI 300 closed down 0.07 percent lower to CN¥3,288.69.

A senior US Treasury official on Monday had expressed concern at the depreciating yuan, adding that it was uncertain whether US Treasury would meet with any Chinese officials this week.

IMF Chief Economist Maurice Obstfeld, however, stated on Tuesday that he was not worried about the Chinese government’s ability to defend its currency despite the recent weakness of the yuan.

The yuan has been hit by strong selling pressure this year, falling more than 8 percent between March and August at the height of market concerns, but it has since cut losses as authorities increased support.

Obstfeld also said financial markets have emphasized too much on short-term movements in China’s currency, noting that the yuan has often been quick to recover from times of volatility in recent years.

The IMF has been urging Chinese authorities to deemphasize growth capacity to focus more on its quality and sustainability to allow the economy to better endure shocks, according to Obstfeld.

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