Punishing U.S. tariffs on some Chinese imports are due to take effect Friday, with China planning tariffs on an equal amount of U.S. exports.
Officials in China, the epicenter of the worldwide trade row, have warned the United States that the tit-for-tat tariffs on each others' goods will ultimately prove detrimental for American businesses and jobs.
The yuan's 3 per cent decline against the dollar over the past two weeks is largely seen as reflecting fears over a possible trade war between the world's two biggest economies. The currency then reversed earlier losses to move back into positive territory for the day against the dollar.
The question is how much further, and how quickly, the yuan might fall.
On economic news, Hong Kong's value of total retail sales in May, provisionally estimated at HK$40.5 billion, rose 12.9% over the same month in 2017, according to the Census and Statistics Department.
"The possibility that the market may continue to misinterpret PBOC policy fine-tuning, and subdued sentiment, may lead to overshooting risks" for the currency in the near term, Xing and his colleagues wrote.
Other Asian currencies weakened, especially those such as the Indonesian rupiah that are doubly exposed - to trade and oil prices approaching $80 a barrel.
In share trading Hong Kong sank more than three percent at one point as traders returned from a long weekend break to play catch up with the rest of Asia's retreat on Monday. An index tracking healthcare firms is up almost 20 per cent so far this year, while the Shanghai index is down around 15 per cent.
On commodity markets, copper edged higher on Tuesday but was still near a seven-month low reached in the previous session as the trade tensions raised concerns about demand. Gains of around 1 percent in tech firms such as Microsoft and Apple offset concerns about trade and its impact on growth.
By the midday trading break on Monday, the blue chip CSI300 index was down 1.4 per cent, while the Shanghai Composite Index fell 1.1 per cent.
Beijing will retaliate on multiple fronts, probably extending its punitive measures beyond goods to trade in services and to the operations of United States companies on mainland China, Baig said.
Speculation was rife China's central bank was intervening in the currency market to staunch losses and prevent a potentially destabilizing sell-off in the yuan, while stocks came off a searing sell-off in the morning.
Four traders told Reuters that major state-owned banks were seen swapping yuan for dollars in the forwards market yesterday and immediately selling some of them into spot market, which helped support the Chinese unit.
But those most exposed to trade such as the Australian dollar and emerging currencies remain under pressure - the Aussie, considered a liquid proxy for China-related risk, was close to 1-1/2-year lows against the greenback AUD=.
The Reserve Bank of Australia (RBA) kept rates at record lows of 1.5 percent, as widely expected, at its monthly policy meeting on Tuesday and showed no hint of hiking anytime soon.