Won Falls to Four-Year Low on Rate-Cut Bets After Yuan Devalued

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The won fell to the weakest level in almost four years amid speculation the Bank of Korea will cut interest rates further to spur growth after China devalued the yuan.

South Korea faces uncertainties from China, the nation’s biggest overseas market, and persistent export weakness, Finance Minister Choi Kyung Hwan said at a meeting in Seoul Wednesday. The People’s Bank of China weakened the reference rate for its currency by a record Tuesday amid a deepening slowdown in Asia’s largest economy. All 16 economists surveyed by Bloomberg see the BOK keeping borrowing costs at an unprecedented 1.5 percent on Thursday, after cuts in June and March.

The won fell 1 percent to close at 1,190.44 a dollar in Seoul, according to data compiled by Bloomberg. It dropped to 1,195.51 earlier, the weakest since October 2011. The currency has declined 8.4 percent this year.

“The won will react sensitively to the yuan’s moves going forward, and all focus is on whether China will show it favors a weak currency,” said Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul. “Expectations for another BOK rate cut are building after China’s surprise move.”

South Korea is closely monitoring the currency market as China’s yuan devaluation, along with the Federal Reserve’s possible rate increase, is raising volatility in financial markets, Finance Minister Choi told reporters in Seoul Wednesday.

China’s devaluation appears to be part of the PBOC’s effort to move toward a more market-based currency regime, according to a BOK official Tuesday, who asked not to be named as he isn’t authorized to speak publicly on the matter.

South Korea’s jobless rate fell to 3.7 percent in July, Statistics Korea reported Wednesday. The median estimate in a Bloomberg survey was for it to remain at 3.9 percent for a third month. Exports shrank for a seventh month in July, while gross domestic product increased 2.2 percent in the three months through June, the least since the first quarter of 2013.

Bank loans to households rose to a record 601.9 trillion won ($506 billion) in July, the central bank reported Wednesday.

Sovereign bonds rose, with the yield on notes due June 2025 falling six basis points to 2.27 percent, Korea Exchange prices show. The three-year yield declined two basis points to 1.72 percent.

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