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Won Suffers Biggest Daily Drop in 11 Years
By Kim Jae-kyoung
Staff Reporter
The continuing collapse of financial markets across the globe suggests that most countries are equally exposed to the fallout from the global economic recession triggered by the Wall Street crisis.
However, when it comes to currency, Korea has fallen as the biggest victim to the turmoil as its currency has lost the most value against the U.S. dollar among major currencies since the beginning of the year.
The local currency took its heaviest beating in a decade Thursday, with the biggest slide in over 10 years. The won closed at 1,373 won per dollar, down 133.5 won from the previous day, the largest daily drop since Dec. 31, 1997.
The won has lost a total of 436.9 won or 31.8 percent in value from the end of last year, the biggest depreciation against the greenback among 20 major currencies, according to the Bank of Korea (BOK).
The won's extremely poor performance is standing out as most other currencies have weakened at a much slower pace against the dollar. Some currencies, such as the Japanese yen, even gained some ground over the same period.
The yen was up 12.9 percent against the dollar Thursday from the beginning of this year, while the Chinese yuan and Taiwanese dollar have also gained 7.1 percent and 0.3 percent, respectively.
Australia was the second largest loser with its currency losing 24.6 percent, followed by New Zealand (-21.9 percent), Britain (-12.9 percent), Thailand (-12.1 percent), and the Euro-zone (-6.9 percent).
The won's unusual weakness has been mainly caused by weak economic fundamentals, the government's loss of credibility in the market and its smaller market size. In addition, local financial firms' hedging against currency risks associated with overseas funds contributed to the extreme volatility.
Economic fundamentals have been weakening due to the widening shortfall in the current account coupled with the heavy debt burden in the banking sector. Its small size has exposed the market more heavily to external shocks.
The current account deficit reached $12.59 billion between January and August, while overseas borrowing in the banking sector soared to $210.49 billion in June from $194 billion at the end of 2007 and $83.4 billion at the end of 2005.
``The disorderly rise of the won-dollar rate reflects a major fundamental weakness in the outlook for the Korean economy and a downturn in foreign investment,'' a local currency dealer said.
``The heavy debt burden has become another fundamental won-bearish factor. It was caused by local banks' heavy overseas borrowing to support their lending here,'' he added.
Inappropriate government intervention has consumed the credibility of financial authorities, which has intensified market volatility.
``Attempting to distort its functioning for anything other than `smoothing' purposes is almost likely to have unintended consequences,'' Market Force Company CEO James Rooney said.
``Unusual money flows and the responsive behavior of market participants should be read as valuable symptoms of market distortions and imbalances, and not as causes of the underlying problem themselves,'' he added.
Analysts said that wild fluctuation in the foreign exchange rate could hurt the soundness of the financial sector as well as the economy.
``The risk of the disorderly rise in the won-dollar exchange rate is that financial stress on issuers of dollar-denominated liabilities depresses economic activity, cascades into the banking system and erodes the health of banks,'' ING Group chief economist Tim Condon said.
kjk@koreatimes.co.kr
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