The United States is likely to designate China as a currency manipulator next month, according to industry sources on Sept. 19. Under the circumstances, concerns are mounting over an increase in forex market volatility.
Once China is designated as a currency manipulator, the U.S. and China have to conduct bilateral negotiations for one year. If the negotiations end in vain, financial support for American companies investing in China is stopped and Chinese companies cannot bid in the U.S. procurement market. In addition, the U.S. government can ask the IMF to strengthen its monitoring of China.
With the ongoing trade war between the U.S. and China spreading to the forex market, the won-dollar exchange rate is likely to become increasingly volatile.
In the short term, the South Korean currency is predicted to depreciate in spite of some ups and downs. Global uncertainties such as the trade disputes tend to lead to appreciation of the U.S. dollar and capital outflow from South Korea. At present, foreign funds are continuing to flow into the South Korean bond market despite the interest rate gap between the U.S. and South Korea, and this is because exchange gains from won appreciation exceed losses attributable to the gap.
Also, the won-dollar exchange rate may fall after the designation in that the bilateral negotiations and financial restrictions are likely to result in yuan appreciation followed by won appreciation. Exports from South Korea, which rely heavily on China, may be negatively affected if the Chinese economy takes a hit during the course.