Weakening won burdening Korean equity market

An electronic board set up at Hana Bank headquarters in Seoul shows the movement of the benchmark KOPSI and the won-dollar exchange rate, on Wednesday morning. Yonhap

KOSPI bounces back after 9 trading days

By Lee Min-hyung

The surging won-dollar exchange rate comes as a growing burden for Korea's equity markets, but fears over the steep depreciation of the Korean won against the U.S. dollar will be short-lived, economists said Wednesday.

The exchange rate soared up to 1,170 won, Tuesday, for the first time in about a year. But the exchange rate dipped Wednesday by 8.3 won to close at 1,168 won per dollar.

Economists attributed the recent surge in the exchange rate to a combination of multiple external factors that led to the appreciation of the dollar.

“We cannot say that one single factor has driven the steep rise of the won-dollar exchange rate,” Korea Capital Market Institute economist Lee Seung-ho said. “This resulted from comprehensive changes in the market environment ― such as foreign investors' recent selling spree of Korean stocks, tapering signals from the U.S. and the fourth wave of coronavirus infections.”

The benchmark KOSPI bounced back on Wednesday after experiencing a plunge for eight consecutive trading days until Tuesday on foreign investors' selling spree of the nation's large-cap tech stocks. The secondary Kosdaq also tumbled Wednesday morning to below 1,000 points for the first time in about two months. The KOSPI rose by 0.5 percent to end at 3,158.93, while the Kosdaq jumped by 0.99 percent to finish at 1,021.08.

Samsung Electronics and SK hynix are two stocks that foreigners had sold the most for two weeks since Aug. 2. According to data from the Korea Exchange, foreign investors net-sold Korean stocks worth more than 7 trillion won ($5.99 billion) during the five trading days last week.

A concern over earlier U.S. tapering sparked the foreign exodus in the Korean stock market. Last week, Dallas Federal Reserve President Robert Kaplan urged the central bank to start tapering purchases of treasury bonds in October.

Even if U.S. Federal Reserve Chairman Jerome Powell remains mum over the specific timeline for the country's tapering, some economic indices there ― such as employment ― have been building up momentum for the possibly earlier-than-expected tapering.

The Korean stock markets closed with a slight gain Wednesday, but uncertainties surrounding the won-dollar exchange rate still cause downward pressure on the local equity market.

If the dollar continues to strengthen its valuation against the Korean won, chances are that Korean stock markets will tumble once again soon. A growing sign of earlier U.S. tapering also comes as a key factor to drive up the won-dollar exchange rate, which raises the likelihood for additional foreign capital exodus here.

Against the backdrop of this external environment, the Bank of Korea (BOK) is highly expected to increase its key interest rate during its upcoming rate-setting meeting slated for Aug. 26. The central bank has frozen the rate at 0.5 percent since May 2020, as part of efforts to rev up the sagging economy from the pandemic shock.

Korea has reported four-digit daily coronavirus infection cases since July 7. This is generally seen as a factor weakening the valuation of the won against the dollar.

Regardless of the possible rate hike, economists said chances remain slim for the exchange rate to rise further by a huge margin, as it has already soared to an excessive level.

“Even if a further rise of the exchange rate appears unlikely, we still cannot rule out the possibility of its additional increase if foreigners continue to engage in a selling spree of local stocks,” Lee said.

KB Securities economist Kim Hyo-jin also said the exchange rate is unlikely to surge further despite lingering volatility in the local stock market.

“Even if there stands a likelihood for foreign investors to keep engaging in mass selling of local stocks worth 5 trillion won, the exchange rate has a very limited possibility of increasing more,” the expert said.

The economist forecast the rate to start showing signs of stabilizing after a planned U.S. Federal Open Market Committee meeting slated for late September.