U.S. stocks tumbled Tuesday, as China's currency yuan fell drastically in value following a central bank decision to improve the yuan's central parity system that aims to better reflect its market exchange rate against the U. S. dollar.
The Dow Jones Industrial Average dropped 212.33 points, or 1.21 percent, to 17,402.84. The S&P 500 declined 20.11 points, or 0.96 percent, to 2,084.07. The Nasdaq Composite Index shed 65.01 points, or 1.27 percent, to 5,036.79.
The People's Bank of China (PBOC) cited a strong U.S. dollar and sharp appreciation in the RMB real effective exchange rate as key considerations behind the policy change.
Effective from Tuesday, the Chinese currency's daily central parity quotes should be based on the closing rate of the inter- bank foreign exchange rate market on the previous day, supply and demand in the market, and price movement of major currencies, according to the PBOC.
Following the change, the central parity rate of the RMB, or the yuan, weakened sharply by 1,136 basis points to 6.2298 against the U.S. dollar on Tuesday.
U.S. analysts said the PBOC's decision is expected to add further momentum to the strong dollar, which would be a headwind against U. S. multinationals.
On the economic front, U.S. labor productivity rebounded slightly in the second quarter of this year after falling over the previous six months.
The Labor Department said Tuesday nonfarm business sector labor productivity increased at a 1.3 percent annual rate during April- June, following a decline of 1.1 percent in the first quarter.
In corporate news, after Monday's closing bell, Google Inc. announced that Alphabet Inc. will replace Google Inc. as the publicly-traded entity and all shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights. Google will become a wholly-owned subsidiary of Alphabet.
Shares of Google (GOOGL) jumped 4.10 percent to 690.30 dollars apiece following the announcement on Tuesday.
The CBOE Volatility Index, often referred to as Wall Street's fear gauge, increased 12.10 percent to end at 13.71 on Tuesday.
In other markets, oil prices dived as crude output from the Organization of Petroleum Exporting Countries (OPEC) increased in July.
The West Texas Intermediate for September delivery moved down 1. 88 U.S. dollars to settle at 43.08 dollars a barrel on the New York Mercantile Exchange, while Brent crude for September delivery decreased 1.23 dollars to close at 49.18 dollars a barrel on the London ICE Future Exchange.
The U.S. dollar fluctuated against most major currencies as Greek government sealed its third bailout deal.
In late New York trading, the euro moved up to 1.1035 dollars from 1.1019 dollars in the previous session. The dollar bought 125. 15 Japanese yen, higher than 124.61 yen of the previous session.
Gold futures on the COMEX division of the New York Mercantile Exchange closed higher, rising for a fourth straight session, amid uncertainties about the global economy.
The most active gold contract for December delivery gained 3.6 U.S. dollars, or 0.33 percent, to settle at 1,107.70 dollars per ounce.