As the global financial market is rocking due to growing tensions between the United States and China, global investors tend to withdraw capital from South Korea as its capital market is relatively open. Accordingly, the value of the won is falling more sharply than the currencies of other countries.
The won has depreciated by 3.82 percent against the U.S. dollar from April 1 to May 10, according to the Bank of Korea (BOK) on May 12. Among currencies of emerging countries which have a certain level of economic scale, it showed the third largest decline in value after Turkey’s lira at 10.13 percent and Argentina’s peso at 4.31 percent,
The currencies of Malaysia, Indonesia, India, Brazil and Thailand as well as Taiwan have been devalued because of global capital’s preference of safe assets. However, they showed a smaller drop in value than that of the won. The yuan of China, the country directly involved in the trade conflict with the United States, has been weak but the rate of depreciation against the U.S. dollar has remained at 1 percent. The currency of the Philippines and Mexico has gained value against the U.S. dollar over the same period. Considering the fact that Turkey and Argentina have faced the greatest challenges, such as the conflict with the United States and hyperinflation, the won has shown the biggest decline in value among currencies of emerging countries.
Market experts say that the won can surpass the 1,200 won level in the short term if the trade conflict between the United States and China continues. Cho Young-moo, a senior economist at the LG Economic Research Institute, said, “Foreign investors believe that the trade conflict between the United States and China has relatively great influence on South Korea because the country is heavily dependent on exports to China. So, the trade deal between the United States and China will decide on the direction of the won-dollar exchangerate in the short run.”
The government is keeping an eye on the skyrocketing currency exchange rate. An official from foreign exchange authorities said, “The accelerating depreciation of the Korean currency is a burden for currency authorities.” However, the government is refraining from a direct intervention in the market. This is because the government intervention in the marketplace will not be so effective as the conflict between the United States and China determines the global cash flow. It also believes that foreign investors still have faith in South Korea owing to low credit default swap (CDS) risk premiums, which indicate the degree of sovereign default risks. Some say that the government allows the depreciation of the won since it can have a positive impact on export as long as it does not lead to a large-scale capital outflow.