Won Closes at 11-Year Low of 1,570 Against Greenback
By Kim Jae-kyoung
Staff Reporter
The local currency extended its losses Monday, hitting an 11-year low against the U.S. dollar, with investors scrambling to the exit for a flight to safety on concerns that the global recession is worsening.
The won closed at 1,570.3 won per dollar, down 36.3 won or 2.31 percent from the previous close, the lowest level since March 11, 1998. The won has lost 19.8 percent so far this year, the biggest depreciation among major currencies.
Market analysts said that unless short-term debt concerns are removed, the local currency is expected to continue losing ground against the greenback, with the exchange rate soaring above 1,600 anytime soon.
``In an environment of elevated risk aversion, Korea's ratio of foreign exchange reserves to short-term external debt is not high enough to insulate the won from contagion,'' ING Group Asia senior economist Tim Condon said.
``We think Korea's trade balance is won-positive but not enough to offset elevated global risk aversion. At the current elevated level, the risk is that a negative shock pushes financial markets into panic mode,'' he added. ``The won-dollar rate could test 1,700 in this environment.''
Korean stocks also fell sharply as investors dumped banking and tech shares on deepening financial jitters and the won's slide. The key KOSPI lost 44.22 points, or 4.16 percent, to finish at 1,018.81.
Foreign investors led the declines, continuing their selling spree of local stocks for 15 days in a row, dumping a net 416.4 billion won ($264 million) worth on the main bourse, the largest sell-off in four months since Nov. 4 last year.
``Investors both at home and abroad are rushing to rake in dollars as fear is turning into panic due to growing pessimism over a recession,'' a local bank currency dealer said on condition of anonymity.
``Concerns about the health of the U.S. banking industry and the deteriorating economic conditions in Eastern Europe are denting market sentiment further,'' he added. ``In particular, foreign investors' suspicions about the nation's ability to service short-term external debts are adding to market jitters.''
However, most analysts said that although the local financial market will remain volatile for quite some time, the chances are slim that the country will face a currency crisis akin to the one during 1997-98.
David Mann, head of Korea Research at Standard Chartered Bank, said, ``While the foreign currency funding situation is toughening, we do not expect to see the difficulties get as bad as was seen back in September and October in 2008.''
``We will be watching the current account balance in the first quarter as the fundamental driver for the Korean won,'' he said.
Since the level of foreign exchange reserves and short-term external debts are at the center of market jitters, the government will need to manage the reserves in a conservative manner, say observers.
``Intervening against the market trend even for a short term can be very costly, evidenced by previous experience. In the current environment, many market players are looking at the foreign reserve level,'' S&P Analyst Kwon Jae-min said.
``A significant fall in foreign currency reserves due to government market smoothing activity could cause sentiments to turn negative,'' he added.
Condon also said, ``About all the authorities can do in the short term is to take measures that allay concerns about a (short-term debt) payments problem. The announced measures do that.''
The government recently announced steps to increase U.S. dollar liquidity, including tax incentives for foreign investment in treasury bonds and incentives for overseas Koreans to invest in property.