The South Korean 10,000-won bill shows a portrait of King Sejong the Great (1397-1450}. Photo: AFP / Blanchett / Leemage

South Korea’s foreign exchange market seemed to be in a panic at one point Tuesday after news broke that the US had designated China as a currency manipulator, but the foreign exchange authorities’ intervention subdued the won’s fall.

The won touched an intraday low of 1,223.0 won per dollar in Tuesday’s morning session affected by the news that the US labeled China a currency manipulator. But, it closed at 1,215.3 won at the same level as the previous day’s close due to the sale of dollars by the Korean foreign exchange authorities.

The dollar/won rate fell to 1,209 won at one point but rebounded later as foreign investors sold shares worth more than 600 billion won.

Korean foreign exchange authorities look determined to stabilize the market.

“I was nervous when I heard that the U.S. designated China as a currency manipulator,” a senior official at the foreign exchange authorities said to Asia Times. “we will take firm market stabilization measures against market instability factors.”

Earlier in the day, Bank of Korea Governor Lee Ju-yeol said in an internal meeting to inspect the financial and foreign exchange markets, “The stability of the market, especially in the foreign exchange market, is most important. We will manage liquidity in the market in a deliberate manner while working closely with the government.”

The Japanese government’s decision to exclude Korea from a “white list” of countries favored in trade has a limited impact on won’s weakness as the prevailing view is that it will not lead to the suspension of exports, but lead to longer and more complicated process of exporting strategically important parts and materials to Korea.

However, external conditions affecting the dollar/won exchange rate are still tilting toward the won’s weakness. Above all, the Korean won moves in the same direction as the Chinese yuan, and the Chinese yuan is under downward pressure due to the prolonged and exacerbated US-China trade war.

The Chinese authorities, after allowing the yuan to breach the symbolic seven yuan mark on Monday, also appeared to put the brakes on the rapid depreciation of the yuan.

People’s Bank of China set the yuan fixing at 6.9683 per dollar, which is stronger than the critical line of seven yuan even if yuan is trading weaker than seven yuan at the market. PBOC sets a daily starting point for yuan trading considering market trends, and the daily fluctuation of the dollar/yuan exchange rate is limited to 2% of the price set by PBOC.

The central bank’s announcement of issuing 30 billion yuan worth of yuan-denominated bills in Hong Kong was also seen as a move to curb the yuan’s weakness by soaking up yuan liquidity.

The global stock market, including the Korean market, suffered from turmoil this week due to the worsening US-China trade war. Seoul repeatedly expressed its will to stabilize the financial markets.

Hong Nam-ki, the Korean deputy prime minister and finance minister, said on Wednesday in a ministerial-level meeting to check markets that, if necessary, “we will take quick and bold measures to stabilize supply and demand of stocks such as softening rules on share buybacks and reinforcing regulations on short-selling in accordance with the contingency plan that is in place. ”

Beijing’s move to stabilize the yuan market inspired sighs of relief by players in Seoul.

A foreign exchange expert said to Asia Times that “PBOC’s action to set yuan fixing stronger than market rate and issuance of the yuan-denominated bill seems to be an expression of the will to stabilize the exchange rate.”

Experts predict that Beijing is not likely to allow the yuan to depreciate sharply due to concern regarding massive capital outflow. “If China gives the impression that the yuan’s fall is not in control due to the rapid fall of the yuan, it could cause a capital outflow,” the foreign exchange expert said.

However, experts said, since China has already allowed the exchange rate to break the seven-yuan mark apparently in response to the US plan for further imposing tariffs, there is a small chance that the dollar/yuan exchange rate would return to to the six-yuan level.

Therefore, they predicted that the won, which has a strong trend of sympathy with the yuan, would also be in a bearish and volatile trend.

The expert said, “Amid exiting downward pressure, the won is likely to suffer from volatility in response to Beijing’s foreign exchange policy and move of foreign stock investors in Seoul.”

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