Zutronius
Joined: 16 Apr 2007
Location: Suncheon
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 Posted: Mon Sep 29, 2008 4:25 pm Post subject: Won Hits Five Year Low |
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The local currency threatened to breach the level of 1,200 won per U.S. dollar yesterday, as the credit panic drove up global demand for the dollar, despite agreement on the $700 billion rescue plan, analysts said.
The won plunged to 1,200 won during intra-day trading but slightly rose to close at 1,188.8 won, down 28.3 won from the previous day. That was the lowest close for the local currency since 2003.
The stock market tumbled as well yesterday, with the benchmark Korea Composite Stock Price Index down 19.97 points or 1.35 percent to end at 1,456.36.
"The won's decline is quite unexpected, because many had anticipated that the U.S. rescue package would ease some worries about the credit crisis and slow down the pace of the weakening won," Seo Chul-soo, an analyst at Daewoo Securities, said.
"The weak won is being largely affected by a strong dollar on offshore investors' dollar purchases. The U.S. dollar is also strong against other currencies, including the euro and the yen following the bailout news."
U.S. legislators reached an agreement over the weekend to allow the U.S. Treasury Department to buy up to $700 billion of troubled assets in financial institutions so that banks can resume lending and provide liquidity in the tightened credit markets.
However, Korea's chronic capital account deficit and the recent turning of the current account into the red make the dollar more precious in the local foreign exchange market, and keep the won fundamentally weak against the dollar, Seo noted.
To keep the won from sliding, the Finance Ministry made a verbal intervention earlier in the day when the won was nearing 1,180 won to the dollar.
"The sharp volatility in the won-dollar exchange rate is determined to be excessive and we will take the necessary action to stabilize the local currency market," Choi Jong-ku, the ministry's international financial bureau, told reporters in Gwacheon.
However, the currency fell further to touch 1,200 won in the afternoon.
Industry watchers said that the government must have intervened in the foreign exchange market in the afternoon, given that the won gained later in the day.
However, the Bank of Korea's injection of dollars in the market can be limited, as the bank is soon to report the latest data regarding foreign reserves for September, they said.
Korea's foreign reserves shrank to $243.2 billion in August from $262.2 billion in late 2007, as the foreign-currency authorities have been using the dollar to prop up the falling won and to curb inflation.
"For foreign investors, the current account and the foreign reserves data are the most important determinants in their investment sentiment toward Korea," Bae Min-keun, a research fellow at the Samsung Economic Research Institute, said.
"Since the foreign reserves have been falling, the intervention will not be so easy," he said.
The weakening won has caused concern about the banking sector and SMEs' troubles linked to currency option contracts, as well.
The Finance Ministry said last week that it would provide at least $10 billion in the swap market to ease dollar shortages. The ministry had expected the dollar injection and the U.S. government's rescue plan would work favorably for the local financial markets.
Citibank Korea economist Oh Suk-tae said it is almost impossible to predict how the won will move in the future because the U.S. financial market is extremely uncertain for now.
By Kim Yoon-mi |
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