Concerns mount over weakening won amid surging US dollar demands

The Korean currency trades at 1,476.80 won against the US dollar on the trading floor of Hana Bank in Seoul, Monday. Yonhap

The Korean won has rapidly been weakening to nearly 1,480 won against the dollar despite the receding strength of the global currency, prompting concern over the country’s structural imbalance brought on by sizable offshore investment by the National Pension Service (NPS) and retail investors upping U.S. equity holdings, market watchers said Monday.

The weaker currency is also accelerating inflationary pressures due to higher import costs, as prospects of tempered U.S. dollar demands fade due to more financial and private firms seeking to hedge in an effort to limit fallout from more currency volatility.

The government has activated an inter-agency task force to monitor developments in foreign exchange market and exporters’ currency conversion, outlining measures to encourage dollar selling.

The won-dollar rate closed at 1,471 won as of 3:30 p.m. Monday, up 2.7 won from the previous session.

“The won is decoupling from global dollar trends, indicating that Korea’s currency is shaped less by external factors but more by domestic capital flows,” Standard Chartered Korea economist Hong Dong-hee said. “This is a challenge sustained by investment trends by retail and large institutional participants in Korea, and the authorities will find it harder to manage the currency trajectory.”

Financial market data shows the Korean won has slid to the 1,470-won range, the weakest monthly level since the 1998 Asian financial crisis.

The won’s closing price from Dec. 1-Dec. 12 came to 1,470.4 won per dollar, weaker than November’s average of 1,460.44.

The won’s depreciation is concerning since its underperformance is singular relative to other currencies.

The U.S. dollar index has fallen back to mid-October levels of 98.40, but the won has continued to dip.

So far this month, the won has depreciated 0.69 percent against the U.S. dollar, despite overall strength of major currencies including the euro, British pound, Australian dollar and Canadian dollar.

Many say the development is explained by steady dollar demands.

According to the Korea Securities Depository, Korean retail investors continue to increase holdings in U.S. stock market, posting net purchases of $5.52 billion in November.

Last month’s figure is lower than October’s all-time high of $6.8 billion, but the figure indicates steady investment outflows.

Meanwhile, financial authorities vowed to take strong measures to limit market volatility amid the currency weakness.

Financial Services Commission (FSC) Chairman Lee Eog-weon convened a meeting with private experts and high-ranking officials from related government agencies on Monday.

The FSC said bond market stabilization funds of 38 trillion won, coupled with 61 trillion won in real estate project financing measures, will be extended through next year, as part of efforts to contain market volatility.

This followed an emergency meeting a day earlier, convened by Minister of Economy and Finance Koo Yun-cheol, attended by top financial regulators, the central bank governor, the health minister and the industry minister, to discuss currency weakness measures.