South Korea's won dropped to its weakest level in more than two months Monday against the U.S. dollar, one of the biggest victims in Asia of the falling Japanese yen and the slowing Chinese economy.
The won's slide adds to a 3.21% drop in May--the currency's worst monthly performance this year--and follows a tumble last week in the Japanese yen, which hit its weakest level in more than 12 years against the dollar.
Pressure on the won is rising from many corners of Asia. A cooling Chinese economy, which made up for approximately 25% of South Korean exports, is hitting South Korea hard, with goods sent abroad falling the most in almost six years, according to data released Monday, down 10.9% year-over-year.
Meanwhile, the Japanese yen's weakness has been one of the biggest worries for South Korean officials, who have repeatedly sounded concern when the yen falls excessively as it makes Japan's goods comparatively cheaper. Despite a lower portion of South Korea's exports going to Japan, the products the two nations exports are similar--largely electronics.
The South Korean won touched 1114.87 against the U.S. dollar Monday and last traded at 1,109.3. Against the yen, the Korean won rose to its strongest level since 2008 last week. The Japanese yen bought 8.937 South Korean won on Monday.
Song In-chang, director general of the Finance Ministry's International Finance Bureau, declined to comment on the won-yen movements but reaffirmed Seoul's policy stance that financial authorities should take actions to stabilize the markets if they turn too volatile.
"We maintain that financial authorities should continue to smooth extreme market swings or one-sided movements," Mr. Song said.
Investors frequently bet against the South Korean won as a way to express their views on a weakening Japanese yen given the close trade links, with analysts saying the current bout of weakness is a reflection of negative sentiment.
"The South Korean economy needs the won to be weaker, definitely against the yen," said Khoon Goh, currency strategist at ANZ in Singapore. "Authorities in South Korea will need to act." ANZ expects the Bank of Korea to cut rates sometime over the next few months.
The main channel of further pressure on the currency could be through South Korea's export-driven stock market, analysts say, which investors have piled into over the past year. The Kospi is up 9.6% so far this year, but has fallen 3.5% since the end of April, and any heavy outflows could weigh on the won.
Another challenge has been South Korea's persistently high trade balance, which analysts say isn't a reflection of a competitive economy or strong growth in exports, but of weak domestic demand and lower commodity prices. This is the conundrum policymakers are faced with as a trade surplus is typically considered a boon for most economies.
Weak exports are beginning to drag on the economy analysts from Morgan Stanley say. "[P]olicy-makers are under pressure to weaken the currency despite the already sizable external surplus." The bank's analysts expect investors "to anticipate some policy response to turn [Korean won] around." They recommend position betting on the U.S. dollar against the South Korea won.
The analysts say the only solutions could be "aggressive policy, combined with greater guidance on [foreign exchange] and additional measures to encourage capital outflows."
original source: http://www.marketwatch.com/story/south-korean-won-slides-to-lowest-in-2-months-2015-06-01