By Park Hyong-ki
Amid tit-for-tat trade disputes between the United States and China, there are growing concerns the feud will destabilize the Chinese yuan leading to wild fluctuations of the Korean won.
Analysts expect the won's depreciation against the U.S. dollar to slow down in the coming week, following China's monetary measures to stabilize its currency.
"China's measures to cushion the yuan are likely to slow not only its depreciation but also prop up the won slightly against the U.S. dollar," said An Young-jin, an analyst at SK Securities.
Last Friday, the People's Bank of China (PBOC) imposed a rule on local banks to maintain their reserves equivalent to 20 percent of their clients' trading of foreign exchange forward yuan positions. The reserve ratio had been at zero.
This comes as the Chinese yuan had reached a record of nearly 7 per dollar as of last week, losing its value of more than 8 percent since April, amid concerns over the trade dispute between the United States and China.
However, the won still remains vulnerable as China could change its tactics to keep its currency undervalued, even though it has indicated it will not use the yuan as "a weapon" in its fight with the U.S. over trade.
China said it would use its fiscal policy to overcome the side effects from the ongoing trade row.
This could happen in the face of the U.S. hard-line position to impose higher tariffs on imported Chinese goods, analysts say.
Along with China's currency stabilization measures, it also announced last Friday it is considering imposing tariffs of up to 25 percent on U.S. imports worth $60 billion a year.
"The market still has to consider China could use the yuan to retaliate against the U.S. in this trade dispute," said Lim Dong-min, an analyst at Kyobo Securities.
The scenario could include the world's second-largest economy lowering the value of the yuan to keep export prices low, as the U.S. upped the ante with tariffs.
However, Lim said this will not be easy because a weaker yuan could ignite a capital flight.
The Korean won has been facing growing volatility during the escalating U.S.-China tariff retaliations, losing over 6 percent since January this year.
The U.S.-China conflict has led investors to unload the yuan to get hold of dollars, compounded with growing concerns over the viability of the Chinese economy.
The value of the dollar has been gaining on the back of strong data for employment and growth, as well as rising interest rates.
The key focus of China's currency measures is really aimed at "stabilizing its economy" as the world's second-largest economy seeks restructuring and to wind down its corporate sector debt, An explained.
The PBOC implemented the reserve requirement rule in 2015 when it tried to cool down the yuan's rapid depreciation and curb currency short-selling via offshore markets.
"Foreign investors are unlikely to unload their Korean shares en masse and rapidly weaken the won, reflecting global investors' risk-averse position even with the U.S.-China tension," said Kim Hyun-jin, an analyst at NH Futures.
He forecast the won-dollar to trade at around 1,120 for a while.