The yuan has fallen about 10 percent since mid-April.
Moody's Analytics estimates that if the tariffs were imposed on autos and most Chinese imports and other countries retaliate as expected, annual USA growth would slow by 0.5 percentage point by mid-2019.
China's Ambassador to the US Cui Tiankai has refuted accusations by the Trump administration against China on trade, noting that only consultations based on mutual respect and trust will lead to a proper settlement of their dilemma.
Jasper Lawler, head of research at London Capital Group, called China's lowering of the trading band "the starting of a currency war" in response to the trade war. The government does, however, enjoy more influence over the value of its currency than the USA does.
"They're certainly not helpless", he said. "Businesses can export more and the country benefits from stronger economic growth".
Positive momentum for the dollar is likely to continue this week as China evaluates its response to the latest USA escalation, which could include tit-for-tat retaliation or a more controlled response. "That hurts consumers and adds to inflation".
USA markets opened lower today in the wake of President Trump's comments to slap tariffs on the rest of China's $505bn worth of imports into the U.S., along with his comments about the strength of the United States dollar.
He likewise also took aim at the dollar, saying a higher value "puts us at a disadvantage" and adding that the Chinese yuan "has been dropping like a rock".
"The (yuan's) slide against the United States dollar will substantially cushion the impact on Chinese exporters from the planned next round of USA tariffs", IHS Markit's chief Asia economist Rajiv Biswas told AFP news agency. That could in turn boost an economy that posted its slowest growth rate in almost two years - 6.7% - in the second quarter.
However, it is a high-risk strategy.
The yuan's decline looks less dramatic compared with other currencies.
The report rekindled anxieties about global monetary policy easing and piled further pressure on investors already struggling to navigate rising protectionism and tense geopolitics. Presidents historically do not comment on the Fed's policy as it could be viewed as influencing the bank's decisions, which are meant to be independent of political influence.
The dollar dropped against the euro as comments by US President Donald Trump risked ratcheting up trade war tensions, while stocks diverged.
As China's officials determine whether to respond to Trump's yuan manipulation charge, economists say there are clear arguments for a cheaper Chinese currency, justifying the current weakness.
"There's no negotiating going on that I can see", Dollar said.
Financial markets were upended after Trump said he's "ready to go" with additional import tariffs and that China, the European Union and others have been manipulating their currencies and interest rates.
In a series of tweets on Friday morning, Trump doubled down on his vocal opposition to the Fed's rate hike, complaining that the U.S.is being "penalized because we are doing so well".