Won crash continues as need for swap with U.S. downplayed

Finance

Published: 28 Sep. 2022, 18:03 Updated: 29 Sep. 2022, 15:30

Won crash continues as need for swap with U.S. downplayed

An electronic display board at Hana Bank in central Seoul shows won trading at 1,439.90 won against the dollar on Wednesday. [YONHAP]

The won fell more than 1 percent against the dollar and stocks declined more than 2 percent on Wednesday as the global market rout continued.

No currency swap is needed, the central bank continued to insist despite the currency now down by more than 20 percent this year, though the bank and the government both indicated they would be intervening in the government bond market.

In trading Wednesday, the won hit 1,442.20 to the dollar, up from 1,421.50 the previous day. It hasn't traded at these levels since March 16, 2009.

The currency is now about 150 won to the dollar away from the global-financial-crisis low of 1,597 won reached March 6, 2009. On Dec. 23, 1997, the all-time low of 1,995.0 was recorded.

Korea has been hit hard by rising interest rates in the United States, higher fuel prices and uncertainties caused by the Russia-Ukraine war. The won's decline accelerated in recent weeks as the U.S Federal Reserve continued to signal hawkishness and as authorities in Korea failed to mount a decisive response.

Measures discussed so far include the use of a foreign exchange equalization fund to provide foreign exchange hedging contracts to exporters, thereby increasing the dollar supply in the onshore spot market.

The Bank of Korea said last week it has agreed to open a dollar-for-won currency swap line with the state pension fund to help meet the demand for dollars in the domestic foreign exchange market.

Central bank officials continue to downplay the need for a swap with the United States, citing Korea's solid fundamentals, significant foreign reserves and net foreign assets.

The possibility of a swap has been mentioned numerous times in recent months.

Under these arrangements, Korea is able to access dollars at a set rate over a given period of time from the Federal Reserve, addressing fears about a dollar shortage and potentially bringing confidence to the market.

"In the situation we face, theoretically, there's no need for a Korea-U.S. currency swap," Bank of Korea Gov. Rhee Chang-yong said Monday, according to a report by the JoongAng Ilbo. Rhee added that preconditions need to be met for the swap agreement to take place.

"Getting the currency swap signed is good because people are feeling anxious," he also noted.

The won is down around 21 percent from the beginning of the year.

The Bank of Korea announced on Wednesday it would buy 3 trillion won of government bonds this week to stabilize the market.

"The goal behind the purchase of the state bonds is to stabilize the bond market, as the yield jumped due to an expectation for the increase of base interest rates," said Cho Soo-young, a spokesperson for Bank of Korea.

The annual yield for the three-year government bond was 4.488 percent on Wednesday, compared to 1.609 percent a year earlier.

On the same day, the Ministry of Economy and Finance also announced it would buy back 2 trillion-won worth of state bonds.

On Wednesday, the Kospi plunged 3.25 percent intraday, led down by foreign and institutional investor selling. The Kosdaq was down 4.27 percent.

Samsung Electronics reached a 52-week low of 52,500 won, down 3.14 percent intraday.

Korea's largest company is facing a number of issues, including high inventories, a chip glut and falling prices. Concern heightened when Apple dropped plans to increase production of new iPhones, indicating that demand for these devices is weak.

Kakao hit a 52-week low intraday of 56,100 won, down 5.40 percent.

The Kospi closed down 2.45 percent, and the Kosdaq 3.47 percent.

BY JIN MIN-JI [jin.minji@joongang.co.kr]