Korea issues verbal intervention with won sinking to 17-month low

The won hit a 17-month low on Tuesday as the Kospi and Kosdaq markets also posted losses amid rising tension in the Middle East and a strengthening dollar.

Electronic displays at Hana Bank in central Seoul show the Kospi and the won-dollar foreign exchange rate on Tuesday. The won sharply depreciated against the dollar on Tuesday, up 0.76 percent or 10.50 won from the previous trading day to close at 1,394.50, amid intensified geopolitical tension in the Middle East. The Kospi closed down 2.28 percent from the previous trading day. [NEWS1]

The won depreciated to a 17-month low to touch 1,400 won against the dollar during trading on Tuesday, prompting the currency authorities to step in to mitigate the sharp plunge amid escalating geopolitical tension in the Middle East.

Korean stocks nose-dived as well, with the main Kospi bourse retreating by over 2 percent as slumping anticipation for base rate cuts has further instilled trepidation in traders.

On Tuesday, the exchange rate of the local currency reached 1,400 won against the dollar at around 11:30 a.m. before closing at 1,394.50 won, up 10.5 won from the previous trading day, according to Seoul Money Brokerage Services.

It is the first time 1,400-won mark has been reached since November 7, 2022, when it hit 1,413.5 won to the dollar mid-trading.

The exchange rate has surpassed the threshold only during three major financial crises so far: the 1997 Asian financial crisis, the 2008 global financial crisis and the 2022 post-pandemic monetary tightening.

The government “is vigilantly keeping a close eye on the movement of the foreign exchange rate and currency supplies,” said the Bank of Korea (BOK) and the Ministry of Economy and Finance in a written statement issued Tuesday afternoon.

The statement, which serves as official intervention by the authorities, warned that “the excessive tilt in the foreign exchange market is not beneficial to our economy.”

The exchange rate has been plunging to a streak of fresh year-lows as of late amid steep escalation in the ongoing armed conflict between Iran and Israel, with the won up around 8 percent from a reference rate of 1,289.4 won on Jan. 2.

Meanwhile, the Kospi dropped 2.28 percent, or 60.80 points, to close at 2,609.63 on Tuesday. The tech-heavy Kosdaq slid 2.30 percent, or 19.61 points, to 832.81.

Foreign and institutional investors net sold 272.3 billion won ($195.3 million) and 293.4 billion won in the Kospi market, respectively, while retail investors net purchased 549.5 billion won.

Most of the market's heavy caps finished lower. Samsung Electronics dipped 2.68 percent to 80,000 won, while SK hynix dropped 4.84 percent to 179,100 won. Kosdaq-listed EcoPro BM declined 3.29 percent to 220,500 won.

The weak currency is likely to pose a heavy interest burden on Korean companies operating overseas.

Corporate external debt — owed by Korean companies in foreign currencies such as the dollar and the euro — stood at a record of $162.6 billion as of the end of last year, up 5.6 percent from a year earlier, according to the annual International Investment Position published by the Bank of Korea in February.

The figure has been on a steady climb, rising from $142.1 billion in 2021 to $154 billion in 2022.

Of the total external debt, outstanding liabilities set to expire within a year since the end of 2023 amount to $16.5 billion, while long-term debt stands at $146.1 billion.

Another factor driving up the value of the dollar is the strong U.S. economy. Retail sales in the United States rose 0.7 percent from the previous month in March, according to data from the U.S. Commerce Department on Monday, rising for the second consecutive month.

As the won weakens while global crude prices climb and interest rates remain stubbornly high, investor woes are growing over burgeoning market volatility.

"With current high oil prices, the strong dollar and high interest rates, a steady decline in the anticipation for a base rate cut is likely to have a negative impact [on the market],” said Jo Jae-un, an analyst at Daishin Securities, in a report issued Tuesday.

Jo added that "an additional increase in global oil prices may drive inflation, thus further pushing down expectations for base rate cuts, which will result in deteriorating investor sentiment and increasing currency volatility.”

The BOK signaled the continuation of its restrictive monetary policy last week, citing sticky inflation and unstable oil prices as uncertainties affecting its decision. The central bank said it would keep the policy rate restrictive for a “sufficient” period.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]