South Korea’s won and the Taiwan dollar tumbled the most in 16 months as the yen’s slide to a 2 1/2-year low fanned speculation their central banks will seek weaker exchange rates to protect exports.
A global currency war seems to be breaking out as monetary easing in Japan drags the yen lower, Ha Sung Keun, a Bank of Korea board member, said today in Seoul. Korean officials hinted last week that they would boost measures to curb gains in the won, which strengthened 8.3 percent in 2012. Taiwan’s central bank said today it would intervene if needed.
The won tumbled 1.7 percent to close at 1,092.63 per dollar in Seoul as overseas investors cut their holdings of the nation’s stocks, according to data compiled by Bloomberg. It dropped 1.6 percent last week, the most since May, as foreigners sold $990 million more of the nation’s equities than they bought. The Taiwan dollar slid 1.1 percent today to NT$29.56 in Taipei. Japan’s currency touched 91.26, the weakest level since June 2010.
“Central banks in the region are watching each other,” said Tarsicio Tong, a Taipei-based foreign-exchange trader at Union Bank of Taiwan. “If the Japanese yen falls more, the Taiwan dollar may have more room to weaken.”
South Korean Finance Minister Bahk Jae Wan said last week the won’s gains had been too steep and the government was “all ready” for new measures to address this. Policy makers in November tightened limits on the use of currency forwards by banks as won gains threatened exports. Bank of Korea Governor Kim Choong Soo said Jan. 14 the nation would take an “active” response if needed on the won, which touched a 17-month high of 1,054.49 per dollar on Jan. 15.
Samsung Electronics Co., the nation’s biggest exporter, said last week a stronger currency may cut 2013 operating profit by more than 3 trillion won ($2.8 billion). Appreciation is expected to continue for the “time being,” Robert Yi, Samsung’s senior vice president, said on a conference call on Jan. 25, after announcing fourth-quarter earnings.
Hyundai Motor Co., the nation’s biggest automaker, reported last week a 5.5 percent drop in profit for the fourth quarter, a period in which the won led gains among major currencies with a 4.5 percent advance. “The won’s appreciation will probably intensify toward the second half of this year,” Chief Financial Officer Lee Won Hee said in a Jan. 24 conference call.
Samsung and Taiwanese electronics manufacturers including Hon Hai Precision Industry Co. compete globally with Japanese companies such as Sony Corp., while Hyundai Motor vies with Toyota Motor Corp. in the auto market. The won and the Taiwan dollar “are likely to take the biggest hits on the current revaluation of the yen,” Wee-Khoon Chong, a strategist in Hong Kong at Societe Generale SA, wrote in a research note today.
Currency moves over the past five years have generally put Japanese exporters at a disadvantage. The yen led Asia gains with a 19 percent advance versus the dollar in that time, while Taiwan’s dollar rose 9.3 percent and the won weakened 13 percent, according to data compiled by Bloomberg.
Over the past 12 months, the yen slumped 15 percent, the won rose 2.8 percent and the Taiwan dollar strengthened 0.7 percent. Taiwan’s central bank sold its currency to counter gains during the final minutes of trading on most days in the past 10 months, according to traders, who asked not to be identified.
South Korea last year tightened limits on use of currency forwards by banks as won gains threatened exports. From Dec. 1, positions at overseas lenders were capped at 150 percent of equity, down from 200 percent previously. The ceiling for domestic banks was cut to 30 percent from 40 percent.
Tensions with North Korea are helping weaken the won, which today fell for a fourth day, the longest losing streak since August. The North’s leader Kim Jong Un vowed to defend his country against hostility from the U.S. after the totalitarian state said last week it planned to test a nuclear weapon. Kim supported government statements that “powerful physical countermeasures would be taken to defend” the dignity and sovereignty of the nation, the official Korean Central News Agency said in a report yesterday.
Swings in the won and the Taiwan dollar may become more pronounced. One-month implied volatility for the won, a measure of expected moves in the exchange rate used to price options, surged 267 basis points today to 9.30 percent and that for Taiwan’s dollar surged 122 basis points to 4.60 percent. Those were the biggest jumps since September 2011.
“Concern that authorities will introduce regulations to stem currency appreciation on top of continued fund outflows are keeping the won weaker,” said Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul. “The yen’s decline is also weakening the won. Investors also remain worried about geopolitical risks on North Korea’s nuclear test.”