(Bloomberg) — Are South Korean authorities drawing a line in the sand for the won?
As the currency dropped around 2% this month toward 1,200 against the dollar, the Ministry of Finance and the Bank of Korea have jawboned the market on at least eight occasions. The rhetoric may have helped cap the won’s losses but selling still persists in the absence of more overt intervention by the authorities.
“The level everyone is watching now is 1,200,” said Kim Doo-un, an economist at KB Securities Co. in Seoul. Given the dollar’s strength, “the authorities probably know that going into the market at this time is like pouring water into a bottomless pit. Thus, such market operations have lost much of their influence compared to the past.”
Asia’s worst-performing currency this year has been buffeted by a sharp slowdown in chip exports, while worsening U.S.-China trade tensions in May have hurt Korea’s economic outlook. Yields on the nation’s three-year bonds are below the central bank’s policy rate of 1.75% as speculation mounts that it will have to ease.
The tone from the authorities has also gotten sharper. The first two warnings in May were generic comments about “closely monitoring” currency markets. They then progressed to statements that steps would be taken if “herd behavior” is seen. On Monday, a finance ministry official warned against massive one-sided trades at a certain time of the day affecting the market.
The won gained 0.1% to 1,192.55 versus the dollar at 11:21 a.m. in Seoul on Tuesday, and is down 6.4% for the year. If the currency weakens past 1,200, this is expected to draw a stronger response from the authorities, said Kim.
“If the won’s moves are excessively big compared to its peers, that is when to expect a stronger reaction by the authorities,” said Kim.
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