Korean won instability continues

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Korean won instability continues

The Korean won continued to weaken on Monday despite the Bank of Korea’s hint that it may intervene in the foreign exchange market, raising concerns about the unpredictable movement of foreign capital.

The won continued to depreciate on Monday, hitting 1,237.7 won against the U.S. dollar during the day. It finally closed at 1,234.4 won.

The nation’s finance and economy chief, however, does not anticipate the BOK’s involvement at this time.

“At the moment, we are not viewing the capital movements as serious as needing intervention,” said Yoo Il-ho, deputy prime minister and finance minister on Monday. “Our chief principle is that when there is any rapid change in the foreign exchange market, we will take swift and stern action.”

The Korean financial market had an unprecedented week during which foreign investors showed a strong buying spree while the Korean currency kept depreciating.

Although the won’s value plunged by more than 2 percent from 1,208.1 won to 1,234.4 won in the past one week, the net amount of purchases by foreigners surpassed 200 billion won ($162 million).

On Monday, foreign investors bought more than 30 billion won worth of local shares.

A rule of thumb is when a currency depreciates, a number of foreign investors usually sell off their won-denominated assets in order to prevent growing foreign exchange losses. Foreigners, however, went the opposite way and maintained their investments in the Korean market, taking the risk of possible losses from the foreign exchange market.

The unprecedented move in the Korean financial market could be an indication that foreign investors aren’t as pessimistic as local investors.

Until early this year, there were worries about accelerating outflows of foreign funds. For the second half of last year, more than 11 trillion won worth of foreign funds left the Korean market. In January alone, the total sell-offs exceeded 3 trillion won.

There was a turnaround in the sell-off trend as investors turned to buying local futures since late January.

Some market observers view the turnaround as a positive change.

“Those who are buying local shares now might have bright prospects on the Korean market,” said Kim Jeong-hyun, a research fellow at IBK Investment & Securities. “Rather than eyeing short-term returns from arbitrages, they are seeking returns in the long run.”

Analysts also suggest that foreign investors are viewing local low-valuation stocks with prospects for appreciation, and that the weakening won might help stocks of exporters to rally.

Some analysts rolled out reports that the won may depreciate as low as the 1,300 won range.

“Internally, as expectations on a rate hike by the Bank of Korea are rising, pressures on the won’s depreciation are mounting,” said Park Hyung-joong, an economist at Daishin Securities. “Externally, global uncertainties regarding the U.S. interest rate hike and the slowing Chinese growth are also going to lead the won to further depreciation.”

“Depreciation of Asian currencies including the Korean won will accelerate in the near term, which would bring the won to 1,250 won by March and to surpass the 1,300 won mark within the year,” Park added. ?

“The so-called ‘foreign exchange effect’ should accompany recovery of exports,” Park said. “If the export sector doesn’t recover as much as investors expect, the won’s depreciation would only weaken domestic purchasing power and the Korean market might lose trust in its growth potential.”

However, the depreciating won doesn’t appear to be helping the nation’s exports yet. Outbound shipments was estimated to have posted $22.16 billion from Feb. 1 through 20, down 17.3 percent compared to the same period last year, according to the Korea Customs Service.

In January, the monthly exports showed the sharpest plunge of 18.5 percent in six-and-a-half years.

BY SONG SU-HYUN, KIM JI-YOON [song.suhyun@joongang.co.kr]

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