Won's value against dollar plunges to 14-month low amid skyrocketing oil prices

Growing concerns that rising energy prices will drive inflation has made the dollar grow stronger, causing the won to weaken to 1,200 against the US currency

Monitors at the KEB Hana Bank dealing room in Seoul display KOSPI and the won-to-dollar exchange rate on Tuesday. KOSPI fell 1.35% (39.92 points) to 2,916.38, while the KOSDAQ index fell 12.96 points (1.36%) to close at 940.15. (Yonhap News)

Surging global oil prices have roiled South Korea’s financial markets, pushing the won-to-dollar exchange rate above 1,200 won during trading on Tuesday for the first time in 14 months.

On Tuesday, the won-to-dollar exchange rate rose 4.2 won in the Seoul foreign exchange market to close the day at 1,198.8 won as the won weakened against the dollar. The rate spiked to 1,200.4 won at one point in the morning, after the Bank of Korea announced a freeze on its base interest rate. The last time the won-to-dollar exchange rate edged above 1,200 won during the day was on July 28, 2020, when it reached 1,201 won.

Anxious about foreign exchange loss, foreign investors sold off more than 980 billion won (US$818.02 million) of stock in the domestic equities market. In response, Korea’s benchmark KOSPI index dipped as low as 2,901.5 but rebounded by the end of trading to 2,916.38. It was still down 1.35% (39.92 points) for the day.

Samsung Electronics stock fell below the 70,000 won (US$58.43) line, ending the day at 69,000 won, the stock’s lowest level since Dec. 1, 2020 (67,800 won). The 3.5% drop was driven by fears that semiconductor prices will fall.

A major factor is global oil prices, which rose above US$80 for the first time in seven years. On Monday, the price of West Texas Intermediate crude closed at US$80.52, up 1.47%. The last time oil prices were above US$80 was on Oct. 31, 2014. Amid growing concerns that rising energy prices will drive inflation, the dollar — considered a safe asset — is growing stronger, causing the won to weaken.

It’s widely thought that the price of crude oil will continue to rise through the end of the year because of an imbalance in supply and demand. The approach of winter in the Northern Hemisphere will increase demand for oil even as oil producers are determined to hold off on increasing output.

A scarce supply of natural gas is also affecting oil prices. As prices of natural gas and coal surge in Europe and Asia, some of that demand has shifted to petroleum. International investment banks predict that oil prices will rise to the US$90-100 range unless the supply of crude oil can be quickly increased.

A prolonged energy crisis could impede economic recovery, with growing inflationary pressures suppressing demand and denting corporate performance, analysts say. There are even warnings about the possibility of stagflation — a situation in which goods increase in price while the economy is in recession.

But more analysts believe the global economy isn’t likely to face the kind of severe stagflation seen in the 1970s. Bank of America observed that there are major differences between the 1970s and the present day: the inflation rate in the 1970s was above 10%, compared to 3-6% today, and the American economy experienced negative growth in that decade but is slated to hit around 6% growth this year.

But if the Federal Reserve follows through on plans to taper, or reduce the pace of asset purchasing, next month even as a shortfall in raw materials is driving prices higher, emerging economies could take a hit as investment funds drive up.

As inflation exerts more pressure, Korea could also find itself at risk of falling into a vicious cycle in which a weaker won prompts foreign investors to sell stock, driving down stock prices.

By Han Gwang-deok, finance correspondent and Lee Bon-young, staff reporter

Please direct questions or comments to [english@hani.co.kr]