The yuan has been one of the strongest currencies in the world for years, as its nominal effective exchange rate has appreciated 46 percent since China initiated forex reforms by depegging the yuan from the US dollar in July 2005.

The central bank on Thursday set the yuan’s daily reference point just over 1 percent lower from the previous day, at about 6.40 per dollar.

The spot rate is now allowed to trade within a range 2 per cent above or below the official fixing on any given day.

The U.S. Federal Reserve, the European Central Bank and many others are empowered to make decisions without approval from their nations’ leaders.

Speaking earlier this week, another PBOC official said the central bank could directly intervene in the market, after reports that it bought yuan on Wednesday to prop up the unit.

But after a decade of little or no movement, the change rattled financial markets who feared China might be prepared to engage in a currency war with the US and Europe.

After a rough morning session, the yuan pared some losses following the press briefing, hovering around a 0.2% drop at 6.40 yuan per dollar.

Volumes have come down sharply and the domestic market has stabilised after the PBOC said on Thursday there was no reason for the yuan to fall further given China’s strong economic fundamentals.

The currency’s fall comes after the PBOC adjusted the exchange rate formation mechanism on Tuesday, a move designed to better reflect market development in the exchange rate of the yuan against the U.S. dollar.

Vice-governor Yi said China would quicken the opening of its foreign exchange market and would attract more foreign investors as it liberalises its financial markets. However, the move still surprised the market and prompted the lowest valuation of the yuan since October 2012.

“China does not have the need to start a currency war to gain advantage”, he said.

However, Massachusetts Jun, a PBOC economist, told China’s state-run Xinhua news agency Thursday that the central bank is still “fully capable” of stabilizing the exchange rate through direct intervention in order to “avoid herd mentality resulting in irrational movements of the rate”. “The sudden move on the part of China to devalue its currency yuan will have an adverse impact on India’s exports of textiles and clothing, which are facing already sluggish growth due to recessionary conditions in global markets”, Texprocil chairman R K Dalmia said in a statement here.