Korea may fall prey to US-China currency war

By Lee Min-hyung

An escalating sign of the United States-China currency conflict is expected to become a “very serious” fear factor that determines the valuation of Korea's currency, but the scale of the looming challenge remains unclear for the time being due to its infancy, experts said Monday.

The outlook came at a time when the world's two largest economies are stirring their renewed trade dispute into a potential large-scale currency war.

Last Tuesday, Beijing's central bank set its reference rate for the yuan at its weakest point in 12 years, in what Washington views as China's move to step up pressure against the U.S. over their deepening trade feud.

The external political uncertainty has also raised a sense of concern in the local currency market. The Korean won is considered a proxy currency for the Chinese yuan due to the close economic connection between the two countries.

For this reason, the valuation of the won tends to move in the same direction as that of the yuan. Against this backdrop, the latest step by People's Bank of China will likely result in the depreciation of the Korean currency.

The short-term impact from the U.S.-China currency dispute appears to be minimal for the Korean currency market. On Tuesday, the won-dollar exchange rate closed at 1,234.3 won per dollar, down 9.9 won from the previous trading day, despite the decision by the Chinese central bank.

The won-dollar exchange rate did not fluctuate by a huge margin on Wednesday when it closed at 1,234.4 won, up 0.03 percent from a day earlier. The won ended at 1,238.5 won Friday.

But experts said the looming challenge is evident in the case where Washington continues to strongly condemn Beijing and the two countries escalate the standoff into a more full-blown dispute.

“The U.S.-China currency tension is a very serious factor of anxiety for Korea's currency market,” Korea Capital Market Institute economist Kim Han-soo said.

“But as it has been only a few days since the two economic powerhouses started escalating tensions over the issue, we still have to wait and see how seriously the Korean currency market will fall victim to the external uncertainty,” he said.

The economist also pointed out that any dispute surrounding the political tension between the U.S. and China is “very tough” to predict, as both sides unexpectedly reached a deal shortly after their tension appeared to reach a boiling point.

“The unpredictability remains in place, but my view is that both countries are not likely to deepen their currency war, as the issue is not only about the two interested parties, but the global economy,” he said.

The U.S. labeled China a “currency manipulator” in August amid their escalating trade dispute before reversing the decision on January 2020 when both sides signed a “phase one” trade agreement.

But the subsiding tension recently started to rekindle after U.S. President Donald Trump lashed out at China for what he considered a weak handling of the COVID-19 pandemic crisis.

Daishin Securities analyst Lee Kyoung-min said the reviving tension between the two sides would not escalate to a worrying level, as Trump is seeking to step up pressure against China as part of a political card to win his presidential reelection.

“Chances are slim that Trump will end up abrogating the trade agreement with China and impose additional tariffs, as this will result in heightening global economic uncertainties and pose a negative impact on his approval rating,” the analyst said.