Korea: Won slumps as U.S.-China trade war rumbles on
May 20, 2019
The Korean won has had a rough ride in recent weeks, trading at KRW 1,191 per USD on 16 May, which marked a 4.8% depreciation from the same day a month earlier and an over two-year low against the greenback.
The currency’s woes primarily stem from global events, including China’s announcement on 13 May that it would retaliate against increased U.S. tariffs by raising its own tariffs on USD 60 billion worth of American shipments. The worsening feud between Korea’s two largest trading partners threatens to undermine Korea’s external sector, which will be a concern given that growth fell to a near one-decade low in the first three months of this year. Exacerbating matters, global investors appear to be retreating to traditional safe-haven currencies at the moment, such as the U.S. dollar, which has reduced demand for the won.
Looking ahead and postulating how it could affect future monetary policy, analysts at Nomura commented:
“In coming months, along with [the] recent sharp KRW depreciation, still-high debt growth could prompt the [Bank of Korea (BOK)] to pause its monetary policy easing. Indeed, mortgage loan growth, released on 13 May, rose to 7.1% y-o-y in April from 6.9% in March, suggesting household debt growth still needs time to reach the government target of 5%. We therefore do not expect any change in the policy rate and a dissenting vote at the next meeting on 31 May, while we continue to expect the BOK to cut the policy rate by 25bp to 1.50% in Q4 2019.”
Korean Won Exchange Rate Forecast
Our panel of forecasters see the KRW recovering slightly going forward, backed by strong fundamentals such as low inflation and a healthy current account surplus. The won is seen ending 2019 at 1,125 per USD and 2020 at 1,109 KRW per USD.
Author: Edward Gardner, Economist