The Australian dollar has nosedived after China's central bank posted its largest currency devaluation on record.
The dollar fell more than one US cent to 73.07 US cents after the surprise move by the People's Bank of China.
In an attempt to prop up China's weakening export sector, the PBoC changed the trading range for the yuan against the US dollar.
The move effectively devalued the yuan by 1.85 per cent.
Traders expect the PBoC will continue to devalue the yuan to help drive a pickup in Chinese exports.
Westpac senior currency strategist Sean Callow said there was a knee-jerk reaction by traders to sell the Aussie and many other currencies and buy US dollars.
"There's broad demand for the US dollar against a range of Asian currencies on the expectation that the PBoC is going to let its currency depreciate far more substantially over the next few weeks and months," he said.
The yuan, which is tightly controlled by the Chinese government, has been kept very stable against the US dollar for several months.
Meanwhile, the greenback has been rising in anticipation of a US interest rate hike, Mr Callow said.
"That meant that the Chinese currency had also been rising against its regional trading rivals," he said.
"So this step looks as though (China) is loosening the leash on the yuan and allowing it to weaken in order to help exports - also because inflation is well under control."
The move comes as China's foreign trade performance worsened in July, with exports plunging 8.3 per cent on an annual basis, spelling more worry for the world's second largest economy.
China's economy expanded 7.4 per cent in 2014, its weakest rate since 1990, and has slowed further this year, growing 7.0 per cent in each of the first two quarters.
The central bank has cut interest rates four times since November 2014 to boost lending as a driver for the economy.
The US government has also accused China of keeping the yuan undervalued to boost its exports in the past.
But Mr Callow said Tuesday's move was a step towards a more freely floating Chinese currency, in stark contrast to its government's interventionist measures designed to arrest a major stockmarket rout in July.
"They've been keeping (the yuan) very stable but now they're allowing market forces to have a greater impact. And to that extent it should be welcomed," he said.
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