Stronger dollar is new economic worry for Choi

Economy

Published: 03 Oct. 2014, 23:30

Stronger dollar is new economic worry for Choi

The minute the stock exchanged opened Thursday morning, the Kospi lost seven points from the previous day - and then went into a free fall, shedding nearly 30 points. Around 1 p.m., the fall started to get some cushioning and the Kospi finally closed below 1,980, losing 15.38 points.

Blue chips including Samsung Electronics took it on the chin. Samsung, the world’s biggest smartphone maker, saw its stock retreat 1.3 percent from Wednesday while Hyundai Motor dropped 4.5 percent. The Korea Electric Power Corporation dipped 0.41 percent and Posco fell 2.83 percent. Among the top five stocks by market capitalization, SK Hynix was the only one that succeeded in seeing its stock rise, 1.51 percent.

There was one dominant shadow over the market: fear of the strengthening dollar. The dollar has been shaking up the stimulus campaign by Finance Minister Choi Kyung-hwan’s economic team since July.

According to the Korea Financial Investment Association, between Sept. 1 and Oct. 2, foreign investors dumped more than 1.2 trillion won ($1.1 billion) worth of shares on the benchmark Kospi, including market bellwether Samsung Electronics.

This caused the Kospi to fall below 1,980 for the first time in nearly seven months. The last time the stock market was at this level was on March 27 when it closed at 1,979.97.

When compared to May 23, when the market closed at the year’s peak of 2,017.17, the Kospi has fallen more than 2 percent.

The stock market was just one indicator that the economic stimulus pushed by Choi and his economic team has been undermined by the appreciation of the dollar.

“Since the second half of this year, foreign exchange market volatility has been expanding mostly on the back of the strengthening U.S. dollar,” said Chae Hyun-ki, an analyst at KTB Investment & Securities. “The dollar index spot, which shows the dollar value against currencies of six major countries, has reached a new high since July 2010 and especially in the last two months, the euro and the yen depreciation has been gaining momentum.”

The recent appreciation of the dollar was largely caused by growing expectations that the U.S. Fed will be ending its quantitative easing within this month and eventually will raise interest rates.

If so, the value of the dollar will continue to soar against major currencies, including the euro and the yen, and it will result in an exodus of investments in emerging markets.

Choi has employed every means necessary to pull Korea’s economy out of its rut, including tax revisions, real estate market stimulations and even indirectly forcing the Bank of Korea to lower the key borrowing rate.

The market responded well at first, including foreign investors. In July alone, the Kospi rose 3.7 percent and foreign investors purchased 4.8 trillion won worth of stock, a significant increase from 1 trillion won the previous month.

But with Korean companies worrying about weak third-quarter performance reports, market analysts are concerned that the finance minister’s efforts are being totally undermined.

BY LEE HO-JEONG [ojlee82@joongang.co.kr]