Value context and insight. lkm@koreatimes.co.kr
Won likely to continue losing value to dollar
By Lee Kyung-min
By Lee Kyung-min
The Korean won is expected to continue to lose value against the U.S. dollar for the time being amid a mixture of fresh and existing negative developments triggered by global trade disputes, market analysts said Tuesday.
The U.S. designated China as a currency manipulator on Monday (local time), a decision that followed what the United States considers to be deliberate inaction that led to China's currency dropping to below 7 yuan per dollar.
The designation came on the heels of an announcement from China's Ministry of Commerce that the country's companies have stopped buying U.S. agricultural products, its latest move at essentially dismissing U.S. President Donald Trump's “threat” that his country will impose new tariffs on around $300 billion of Chinese goods, because Beijing had not fulfilled a promise to buy large volumes of U.S. agricultural products.
The fast development of the now-drawn-out U.S.-China dispute is straining Asia's fourth-largest economy, further compounded by what is set to become a full-fledged, emotionally charged trade war between Japan and Korea.
Japan decided on Aug. 2 to remove Korea from its “whitelist” of 27 nations that enjoy preferential treatment on Japan's exports of nearly 1,200 items.
The Korean currency plummeted by 17.3 won to 1,215.3 won per dollar, Monday, following the news of China's yuan being weakened below 7 per dollar. It was the lowest since March 9, 2016, when it stood at 1,216.20 won to the dollar.
The won closed at 1,215.30 won per dollar Tuesday, unchanged from the previous session.
“It seems unstoppable,” said Park Chong-hoon, a chief economist at SC First Bank.
“It really is a mixture of negative developments without any bright side to negate that.”
Park said the Korean won depreciated as a direct result of the Chinese currency plummeting to below 7 yuan per dollar, a point he called and many believe to be “the Maginot line.”
“The Korea-Japan trade row has certainly played a role in sending the won down, but the pace was accelerated by news from China. Also it is worth bearing in mind that the Korean won tends to move in line with Chinese currency,” he said.
“Our baseline view is that the won will stabilize at around 1,180 won per dollar. Despite the shocking depreciation Monday ― which reflected the market reaction or even overreaction ― we do not plan to change our initial view.”
However, the won could sink further to 1,245 won, which he views as a “hard-to-break” point.
“We view the mid-1,200 won range as overshooting. But the risk will remain.”
The foreign investors' recently heightened sense of risk-aversion ― evidenced by the stock market authorities activating a “sidecar,” a technical intervention to prevent massive panic-driven selloffs ― will continue to dominate the stock market that will not likely see an upward momentum.
“Foreign investors have stayed out of the Korean stock market for the past few months and they have no reason to change their minds now,” Park said.
The bleak market sentiment will continue for a while until the Korea-Japan trade dispute finds a breakthrough, according to Heo Jeong-in, an NH Futures analyst.
“The Korean won will stay weakened for a while, given that foreign investors have little incentive to return,” she said.
Market expectation has strengthened for the escalation of the U.S.-China trade war after the Chinese authorities left their currency to depreciate against the greenback, a move widely considered to be China seeking the upper hand.
“The market sees a prolonged trade feud between the two countries with the U.S. president's threat on tariffs re-emerging, complicating the status quo,” she said.
Heo dismissed the possibility that the won will drop below 1,250 won, at which point she views government intervention will follow.
“The Bank of Korea will intervene to prevent a market dislocation, a necessary step to stabilize a volatile market. This is important to maintain a healthy financial market because a depreciating won will hurt the country's current account and foreign reserves.”
Both analysts said the Japanese yen will continue to strengthen, due to investor sentiment increasingly seeking safe assets amid an overall global economic slowdown.
“With the global financial markets in turmoil, investors are looking for safe assets,” Heo said.
“Japanese yen ― widely considered a safe asset alongside major global currencies ― will see growing demand.”
Park of SC First Bank agreed.
“Long before the Japan-Korea trade conflict unfolded, Japanese currency has been considered one of the safest assets, and we have seen calls to sell off won and replace it with yen. We believe the trend will continue for the time being,” Park said.