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South Korea Holds Emergency Meeting on Startling Currency Drop

South Korea Holds Emergency Meeting on Startling Currency Drop

(Bloomberg) -- South Korea warned traders that the won’s recent decline is excessive, becoming the latest Asian central bank to step up defense of its currency as the U.S.-China trade war took a toll.

The authorities will hold a meeting soon to discuss trading that has distorted the currency market, according to a finance ministry official who asked not to be named citing policy. The currency has dropped too rapidly in a short period of time, and its weakness is excessive compared to fundamentals, said a Bank of Korea official.

“There is no positive material coming from the U.S.-China negotiations, sentiment in local equities has turned negative and the dollar keeps rallying,” said Min Gyeong-won, an economist at Woori Bank. The warning from the authorities may have come too late, with traders set on selling the currency until it reaches 1,200 per dollar, he said.

South Korea Holds Emergency Meeting on Startling Currency Drop

The won has dropped around 2.1% this month toward 1,200 per the dollar, spurring at least eight verbal warnings from the Ministry of Finance and the Bank of Korea, with the tone getting sharper in recent days. Asia’s worst-performing currency this year has been buffeted by a sharp slowdown in chip exports, while the trade war has hurt Korea’s economic outlook.

The currency rose 0.1% to close at 1,193.15 per dollar, recovering from a loss of as much as 0.2% after the comments from the BOK and the finance ministry. Still, the rebound may be short-lived given the close economic ties between South Korea and China, its largest trading partner, analysts said.

Fruitless Jawboning

“Jawboning may lead to some short-term consolidation in USD/KRW just south of 1,200, but should not alter the general trend for now,” said Terence Wu, an FX strategist at Oversea-Chinese Banking Corp. in Singapore. “As long as there is no significant improvement in Sino-U.S. ties, the pressure is for the dollar to stay on the uptrend against Asian currencies.”

Risk-off sentiment swept Asian markets on Wednesday on news that the U.S. is considering cutting off the flow of vital American technology to as many as five Chinese companies, widening the dragnet beyond Huawei.

The Taiwan dollar and the Indonesian rupiah have also come under pressure with the escalation in U.S.-China tension. Taiwan’s currency has dropped 2% this month, while the rupiah is down 1.8% even as Bank Indonesia supports it by buying bonds.

South Korea does have the resources for more direct intervention, with foreign-exchange reserves of $404 billion as of April.

--With assistance from Ruth Carson.

To contact the reporter on this story: Hooyeon Kim in Seoul at hkim592@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Brett Miller

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