The Australian dollar lost about a percentage point against the US dollar on Tuesday following reports that China has suspended coal imports from the country as relations deteriorate and the US dollar has recovered from a three-week low recorded the day before.
The Australian dollar also fell 0.4% against the New Zealand dollar and the Japanese yen.
Government utilities and steel mills in China have received a verbal notification from Chinese customs to immediately stop imports of Australian thermal and coking coal.
Australian analysts believe that both the country and its currency must withstand the Chinese attack.
Kerry Craig, global market strategist at JP Morgan Asset Management, noted that it is easier to find another supplier of thermal coal than coking coal, making it difficult to replace Australian coking coal.
“There is still a clear symbiotic relationship between the two countries as Australia continues to depend on exports to China and China depends on better quality coal and iron ore from Australia as it rebuilds its economy,” Craig said.
The Chinese yuan remained stable at 6.7410 per dollar offshore after the central bank set a weaker-than-forecast midpoint, offsetting any gain from strong Chinese trade data.
China's central bank also announced over the weekend that it will remove reserve requirements for some foreign exchange forward contracts, reinforcing speculation that Beijing wants to curb the appreciation of the yuan.