With the U.S.-China trade disputes showing signs of lingering, the Ministry of Economy and Finance said on May 13 that it would take measures for financial market stabilization and volatility reduction if necessary. The Bank of Korea also said that it would closely monitor the market situations.
Still, forex market situations continued to deteriorate. The won-dollar exchange rate, which started at 1,180 won per U.S. dollar that day, continued to rise and reached 1,188 won during the trading session, the highest ever since January 11, 2017.
The rise in exchange rate is attributable to the drop in the value of the yuan due to the trade disputes. The yuan-dollar exchange rate, which rose for six trading sessions in a row, topped 6.9 yuan per U.S. dollar in the offshore market that day, inching closer to a psychological resistance of 7 yuan. Earlier that day, the People's Bank of China fixed its reference exchange rate at 6.7954 yuan per U.S. dollar, up 0.06 percent from the previous trading session. The Chinese government is reportedly considering devaluing the yuan against U.S. tariffs and the news is being reflected in the market without delay. A decline in the value of the yuan means won depreciation. The South Korean currency depreciates faster than the yuan in that the former is a floating currency whereas the latter is controlled to some extent by the Chinese government.
A Goldman Sachs report added fuel to the fire. “South Korean won, Australian dollar and New Taiwan dollar are the top three short currencies and buying yen and selling the three currencies can be the best hedge strategy in the event of further global economic deterioration,” the report said.
The won-dollar exchange rate rose due to disappointing export indices and uncertainties related to tariffs on South Korean cars as well. The exchange rate rose by more than 10 won per U.S. dollar that day alone and is forecast to top 1,200 won in no time.