World Economy

Currency war? How China devaluation may impact Fed

China screaming trouble: Pro
China screaming trouble: Pro
China yuan devaluation surprises traders
China yuan devaluation surprises traders
Futures point to negative open
Futures point to negative open

China's surprise devaluation of its currency is an admission of economic weakness and could delay the timing of the Federal Reserve's expected U.S. interest rate hike, strategist Boris Schlossberg told CNBC on Tuesday.

While agreeing the currency move signals economic troubles in China, Jim McCaughan, chief executive of Principal Global Investors, said the Fed will focus on the domestic economic data instead of trying to extrapolate how a slowdown in the Chinese economy might slow activity in the U.S.

The People's Bank of China on Tuesday implemented a one-time depreciation of nearly 2 percent to the yuan to levels last seen three years ago against the dollar. The move was also the biggest one-day fall since a massive devaluation in 1994, when China aligned its official and market rates.

Read More China central bank shocks with yuan devaluation

"I think it's screaming that China is in trouble. ... The Chinese leadership is really starting to run scared," said Schlossberg, managing director of foreign exchange strategy at BK Asset Management.

The currency move also comes amid a shaky Chinese stock market, which the government has been trying to stabilize. The Shanghai composite—which had rocketed more than 80 percent higher over the past 12 months—has plunged 23 percent since hitting a seven-year high on June 12.

Even before the devaluation, Schlossberg had said the Fed won't hike rates for the first time in nine years at its meeting next month, as many on Wall Street believe following Friday's solid July employment numbers.

With the Fed signaling a rate hike, policymakers would be swimming against the tide of central bank accommodation around the world.

"This makes it much more likely they're going to hold," he said in a "Squawk Box" interview. "We are now playing a multi-global chess game on the monetary front."

Schlossberg pointed to comments from Fed Vice Chairman Stanley Fischer acknowledging in a Bloomberg interview Monday that international developments are a factor in policymakers consider when setting U.S. monetary policy.

McCaughan told CNBC the Fed's primary focus is on the U.S. economy. "I don't think this changes much what we saw last week from the jobs data. We're seeing a slowly tightening, modestly growing U.S. [labor] market, which is just about at the point now that zero interest rates are no longer necessary."

David Kelly, chief global strategist at JPMorgan Funds, lands in the McCaughan camp on the Fed. "I don't think the Federal Reserve will back away from tightening because of of this one event. There's lots else that could happen between now and the middle of September," he told CNBC.

While a weaker yuan can hurt U.S. multinational companies' exports, growth in China has been largely infrastructure driven, which draws in commodities but not consumer goods, said McCaughan, whose firm manages nearly $343 billion in assets.

Wall Street was shaping up for a rough open Tuesday morning, after the U.S. stock market Monday broke a seven-session losing streak. But Kelly said he would not shy away from U.S. stocks based on China's currency move.

—Reuters contributed to this report.