Tensions, debt turmoil slam FX, stock markets

A double whammy of rising inter-Korean tensions and fears over European debt problems yesterday sent the Korean won plunging to a nine-month low and the main Kospi stock index to its lowest level since early February.

Analysts expressed worries about the continued weakness of the won and urged authorities to keep watch on foreign-held Korean bonds coming due soon because it could cause volatility in the bond market.

The won closed at 1,250 against the U.S. dollar in the local foreign exchange market, the lowest point since Aug. 19, 2009 when it closed at 1,255 won.

Morgan Stanley, an investment bank, said inter-Korean tensions resulting from the sinking of the naval ship Cheonan are boosting risk premiums and will affect the won more than local stocks.

The won has weakened nearly 10 percent against the dollar in the past four trading days, while the Kospi has fallen by 5 percent.

The won’s recent depreciation has been larger than that suffered by the euro in response to Europe’s fiscal crisis. According to the Bank of Korea, the won has fallen 12.8 percent against the dollar so far this month while the euro has weakened by 6.9 percent.

“The won is suffering more than other currencies because of the additional geographical risk from North Korea,” said Jang Min, a researcher at Korea Institute of Finance. Reports yesterday that North Korea had placed military units on combat alert triggered massive selling of the won.

Credit default swaps on Korean government debt yesterday rose to their highest level since July 21 last year.

But analysts say the weaker won will benefit Korean exporters, although it will add to inflationary pressure as Korea will have to pay more for oil and other imports priced in U.S. dollars.

Selling of Korean shares by foreign investors, worried about the global effects of Europe’s debt crisis, has added to the pressure on the won.

A Bank of Korea official said the won’s loss yesterday was “far worse than we expected” and suggested the central bank may “take action if necessary.”

The Kospi index fell 2.75 percent, closing at 1,560.83, the lowest level since Feb. 8.

By Jung Ha-won, Kim Won-bae [hawon@joongang.co.kr]