Oil resumed its decline as a sharp drop in the Chinese yuan compounded fears that a deepening trade war will depress demand.

(Bloomberg) -- Oil resumed its decline as a sharp drop in the Chinese yuan compounded fears that a deepening trade war will depress demand, countering concerns crude flows may be disrupted following Iran’s seizure of another ship.

Futures lost as much as 1.5% in New York. The yuan weakened beyond 7 a dollar for the first time in more than a decade after President Donald Trump said Friday he can raise tariffs on China to a “much higher number.” That followed his threat the day before to increase levies, which spurred the one-day drop in crude prices in more than four years. Iran a foreign tanker in the Persian Gulf on July 31, the Revolutionary Guards said on their Sepah News portal Sunday, without giving any details about the vessel.

Asian stocks and currencies extended declines on the escalating tension between the world’s two largest economies as China’s move to let the yuan weaken stoked fears of a currency war. Investors are awaiting speeches from Federal Reserve policy makers this week after Chairman Jerome Powell last month’s rate cut didn’t signal the start of a lengthy easing cycle.

“Investors think a full confrontation or military clash between the U.S. and Iran is unlikely, but are more concerned about the possibility the U.S.-China situation will worsen,” said Jun Inoue, a senior economist at Mizuho Research Institute Ltd. in Tokyo. Oil prices could fall a lot further if the additional tariffs on China are imposed and the Fed doesn’t cut rates again, he said.

West Texas Intermediate oil for September delivery fell 75 cents, or 1.4%, to $54.91 a barrel on the New York Mercantile Exchange as of 7:23 a.m. in London after losing as much as 82 cents earlier. The contract dropped 1% last week and tumbled 7.9% on Thursday.

Brent crude for October settlement declined 96 cents, or 1.6%, to $60.93 a barrel on the ICE Futures Europe Exchange. It fell 2.5% last week. The global benchmark traded at a premium of $6.04 to WTI for the same month.

Trump said Thursday he would impose a 10% tariff on a further $300 billion of Chinese imports, before saying the following day that the levies could be raised even further. Beijing to respond. China has a “nuclear option” of depreciating its currency even further as a potential way of provoking the U.S., said Kyle Rodda, an analyst at IG Markets Ltd. in Melbourne.

The ship taken by Iran’s Revolutionary Guards was carrying around 4,400 barrels of smuggled fuel when it was seized near Farsi Island in the western part of the Persian Gulf off Iran’s southwestern coast, Sepah News reported. Iran’s state-run Press TV reported that the seized ship is an Iraqi tanker that was delivering the fuel to some Arab countries in the Gulf. Iraq’s oil ministry denied it was one of theirs.

--With assistance from James Thornhill.

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Andrew Janes, Ben Sharples