2017 sees volatile start for won

The volatility of the Korean won is raising concerns.

Although local analysts projected that the won was not likely to depreciate to the 1,300 level against the U.S. greenback, the situation in the U.S. is affecting the Korean currency along with the growing influence of China. There are growing fears that trade wars between the world’s two largest economies could further deepen the won’s depreciation.

The won on Monday closed at 1,208 won against the dollar. It gained 15.3 won (1 cent) in a single day compared to the last trade on Friday, its sharpest depreciation in five months. The last time the won depreciated so sharply against the U.S. dollar was on Aug. 17 when it added 16.1 won in a single trading day.

It was the first recovery to the 1,200 won level in three trading days.

Last week the won was appreciating as projected by many local market experts.

On Thursday the won recovered to the 1,180 won level after its value appreciated 20.1 won against the dollar to close at 1,186.3 won. It was the first time since Dec. 23 that the won had recovered to 1,180 won. The won had been trading around 1,200 won against the dollar at the end of last year. Several international investment banks predicted the won’s value to fall to 1,300 to the dollar as early as the second quarter of this year.

The sharp appreciation was attributed to the release of Federal Open Market Committee minutes for December’s meeting showing that the U.S. central bank members were less hawkish than expected.

“In the minutes report the Federal Reserve members seems to show substantial concerns over the uncertainties in the economy that president-elect Donald J. Trump would have,” said Cho Yong-koo, a researcher at Shinyoung Securities. “Although most of the committee members agreed that an expansionary policy would help stimulate the [U.S.] economy, they agreed that at this stage it is still difficult to tell how the policies will be executed and what changes they will have on the economic forecast.”

Another factor was China’s currency’s appreciation.

On Thursday the Chinese government set the Chinese currency at 6.9037 yuan against the greenback, which was the sharpest appreciation of the currency in more than eight and half years considering that the previous day yuan exchange rate was set at 6.9526.

However, on Monday the won started depreciating and quickly entered the 1,200 level.

This time the biggest contributor is considered to be the Chinese currency.

Despite the Chinese government efforts to appreciate its currency, the foreign exchange market headed in the other direction.

“As the yuan value started to fall, the Korean won saw a similar fate,” said Min Kyung-won, an analyst at NH Futures.

Some global investment banks have been projecting that the Chinese currency could depreciate as much as 7 yuan against the dollar and even reach 7.6 yuan by the end of the year.

Amid the depreciation of the Chinese currency, China’s foreign reserves have shrunk, to remain barely above the psychological barrier of $3 trillion. This was the smallest amount of foreign reserve China has held in nearly six years.

China has the largest foreign reserves in the world. But last month they were $41 billion less than a month ago to reach $3.01 trillion. China’s foreign reserve have been shrinking for three consecutive months. The problem is that if the yuan depreciates above 7 against the U.S. greenback or foreign reserves shrink below the $3 trillion level, a panic could break out in Asian emerging markets and China could allow a further devaluation.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]