By Na Jeong-ju
Staff Reporter
The won is rapidly losing its strength against the U.S. dollar and the Japanese yen on massive selling of Korean stocks by foreign investors and a forecast of slower economic growth next year, analysts said Thursday.
While the local currency is showing sudden correction after years of steep gains, dealers said that the trading of the won is expected to be relatively volatile amid growing uncertainty about global financial markets.
The won-dollar rate rose above 930 won per dollar for the first time in two months and the won-yen rate rose above 860 won against 100 yen, the lowest level for the won in one and a half years.
Currency dealers and policymakers said the won's weakness reflects the global shift of funds from riskier assets in emerging markets to safer assets amid growing subprime woes in the United States.
``We believe the recent fall in the value of the won is a natural phenomenon reflecting global financial market instability,'' said Lim Young-rok, vice minister of the Ministry of Finance Economy, at a media briefing, Thursday. ``Investor sentiment is weakening here on rising concerns about a credit crunch in global markets, prediction of economic slowdown and volatility in Asian stock markets.''
Global investors are withdrawing investments they made in the country with borrowed yen, causing a sharp fall in the value of the Korean won and financial instability, according to currency dealers.
``As the yen-carry-trade is unwinding globally due to U.S. subprime woes, demand for the dollar and the yen is surging in emerging markets, including South Korea,'' said Kim Seong-soon, a dealer at the Industrial Bank of Korea. ``The won is likely to lose further ground against the dollar and the yen given sharp corrections in the emerging markets in the near term.''
Yen-carry-trades, or the borrowing of yen at low interest rates in Japan to invest in higher-yielding currencies and assets elsewhere, have eased over the past few months amid increased risk aversion by investors in the wake of the U.S. subprime mortgage crisis.
Yen-carry trades are estimated at nearly $200 billion worldwide. The ministry has said the impact of the yen-carry trade liquidation on the local financial market will be limited as the yen-carry trade investment in the country is estimated to be $6 billion.
The dollar and the yen have been strengthening against the won rapidly over the past few days as more investors sold won to buy the currencies amid sharp stock market corrections across the globe.
For the time being, capital outflow from the South Korean market will become stronger as investors move to withdraw their investments in the local securities market to pay off their debts, or to relocate their global investments, according to analysts.
There are rising concerns that Japan's tighter monetary policy will increase the value of the yen, prompting more investors to decrease investments in emerging markets.
``Since Japan hiked benchmark interest rates, the yen has been gaining strength at a faster pace against the dollar and other currencies,'' said Park Moon-seo, an analyst at Seoul Securities.