Won Drops to Three-Year Low After China Devalues Yuan by Record

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South Korea’s won fell to a three-year low after China weakened the yuan’s reference rate amid a deepening slowdown in Asia’s largest economy.

The yuan tumbled after the People’s Bank of China cut its daily fixing by a record 1.9 percent. China’s is the biggest overseas market for Korean goods. South Korea will closely monitor financial markets and review its contingency plan to prepare for various possible scenarios, the Finance Ministry said in a monthly report Tuesday, citing uncertainty in China’s stock market and Federal Reserve policy as external risks.

The won fell 1.3 percent to close at 1,178.94 a dollar, the lowest level since June 2012, according to data compiled by Bloomberg. That took its decline over the last three months to 7.4 percent, the worst performance in Asia after Malaysia’s ringgit. The yuan dropped 1.8 percent to 6.3262 in Shanghai.

“The won tumbled after China weakened its currency, which has an effect similar to monetary easing,” said Kim Moon Il, an analyst at Eugene Investment & Securities Co. in Seoul. “South Korea’s export reliance on China is big, and today’s move will fuel expectations for a rate cut in Korea.”

All 16 economists surveyed by Bloomberg see the Bank of Korea keeping its benchmark rate at a record-low 1.5 percent on Thursday, after reductions in June and March.

The South Korean, Taiwanese and Singaporean currencies are the most sensitive in Asia to China’s foreign-exchange policy, according to an HSBC Holdings Plc report released Tuesday by analysts including Paul Mackel in Hong Kong. While sharp depreciation pressure on regional currencies should fade, the likelihood of a more volatile yuan will lead to greater price swings for Asian currencies, according to the note.

South Korea’s service sector is showing signs of a weak recovery as the impact of the Middle East Respiratory Syndrome outbreak subsides, the Finance Ministry said in its report, which came a day after Finance Minister Choi Kyung Hwan said the nation’s growth engine is slowing.

Sovereign bonds rose, with the yield on the notes due June 2025 falling four basis points to 2.33 percent, Korea Exchange prices show. The three-year yield dropped three basis points to 1.74 percent.

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