A computer monitor shows declining share prices and the falling Korean won in the Korea Exchange in Yeouido, Seoul, Tuesday. The Korean won depreciated 1.8 percent against the greenback to close at 1,516.3 won per dollar while the benchmark KOSPI also fell 35.67 points to 1,063.88, Tuesday. / Yonhap |
By Kim Jae-kyoung
Staff Reporter
The local financial market took another heavy beating Tuesday on the back of an overnight collapse on the U.S. stock market due to growing pessimism over a global recession.
The local currency lost 27.3 won to close at 1,516.3 won against the dollar, the lowest level in nearly 11 years since it fell to 1,521 won on March 13, 1998. The won is the biggest loser among all major currencies, with its value falling more than 16 percent against the dollar so far this year.
The KOSPI also dipped by 35.67 points or 3.24 percent to 1,063.88, as foreign investors extended their selling spree for the 11th consecutive day. The crash came a day after the Dow plunged to a low not seen since 1997.
The crash in the local market was largely triggered by global investors' orderly flight to safety, which has been well manifested in the recent drop in U.S. treasury yield and soaring gold prices.
In particular, the local currency has become hostage to investors' volatility index (VIX), better known as the `` fear index,'' due to the nation's large external debt. The VIX gauges investors' jitters through fluctuating movements of options prices.
The recent development in the U.S. options market suggests that fear among global investors is turning into panic, with the Chicago Board Options Exchange's Market VIX edging past 50, indicating that investors are actively hedging their stock portfolios against further declines.
When stock markets tumble, people scramble to snap up options to hedge against possible losses in the near future. As a result, the more investors panic and pick up options, the higher the VIX jumps.
``The overnight 6.7 percent jump in the VIX is negative for risky assets and Korea is among Asia's riskiest by virtue of Korea's large external debt,'' ING Group Asia chief economist Tim Condon told The Korea Times.
``At the current elevated level the risk is that a negative shock pushes financial markets into panic mode. In a panic the won-dollar rate could hit 1,600 or higher,'' he added.
A high VIX indicates that investor fear has increased. Therefore, it is highly probable that the rising VIX will encourage more investors to pull their investment out of emerging markets.
``Korean financial assets are vulnerable to the rising VIX trend, not an external debt crisis. Elevated financial market volatility would sustain the selling pressure on the Korean won,'' Condon said. ``We think it would be impossible for the BOK to cut its policy rate in such an environment.''
On a local radio show, Sohn Sung-won, a professor of economics and finance at California State University, recently said that the won's weakness is inevitable at least in the short-term due to global investors' flight to safety.
``With every passing day bringing worse news, global investors have scrambled for an exit from emerging markets, including Korea, which is weakening the local currency against the U.S. dollar,'' he said.
``Unless market sentiment improves soon, the won's weakness will likely persist for a while,'' he added.
Market experts said that financial authorities should make all-out efforts to calm market jitters by releasing relevant information in a timely manner.
``The authorities need to do what they have been doing, namely selling dollars from their swap lines and releasing information about the actual state of the economy that calms market players,'' Condon said.
kjk@koreatimes.co.kr
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