Economic conditions are 'severe,' Yoon says, as won tanks

Current economic conditions are "severe," the presidential office said Tuesday, as the Finance Ministry warned speculators not to pile into the won trade, with the currency now at levels not seen in more than 13 years.

Electronic display boards at Hana Bank in central Seoul show Tuesday markets. [NEWS1]

Current economic conditions are "severe," the presidential office said Tuesday, as the Finance Ministry warned speculators not to pile into the won trade, with the currency now at levels not seen in more than 13 years.

"Internal and external economic conditions, like the weak won and the growing trade deficit, are severe," presidential spokesperson Kim Eun-hye said on Tuesday.

Earlier that day, President Yoon Suk-yeol said he will address the economic risks in an emergency meeting and make sure the falling won "does not impose negative impacts on our market."

The won broke 1,340 to the dollar for the first time in 13 years and four months on Monday. It continued to fall Tuesday, hitting 1,346.60 won intraday. The currency has declined more than 10 percent this year.

A declining won puts Korea in a tough situation as households are weighed down by debt and being squeezed by inflation. Raising rates would stabilize the currency but threaten the housing market, while inflation could remain high if rates are increased too slowly.

The brewing economic crisis is as much a test for the president, who is already battling a low approval rating and has few tools at his disposal, as it is for the central bank.

Yoon did not discuss a swap agreement when U.S. Secretary Janet Yellen visited Seoul in July, and such an agreement was not brought up when U.S. President Joe Biden visited Korea in May. The government had insisted that the economy was strong enough to weather the storm and that no new swap agreement would be needed.

The Ministry of Economy and Finance warned against any manipulation of the currency rate on Tuesday.

The ministry "will thoroughly inspect whether there were any speculative factors overseas during the fall in won-dollar exchange rate stemming from the dollar that recently strengthened globally," the ministry said in a statement.

It was the ministry's first verbal intervention since June 13.

The won is down in relative terms against other currencies.

Korea's Big Mac Index was $3.5 in July, down 32 cents from six months earlier, to the lowest level since January 2014.

Korea ranked 32nd, and Japan 41st at $2.83. Switzerland was No. 1, at $6.71.

The index is a survey by the Economist that examines the relative over or undervaluation of currencies based on the relative price of a Big Mac.

The fall in won has contributed to the country's trade deficit as the cost of imports rise.

Korea reported a $25.47 billion trade deficit through Aug. 20 this year. It has reported trade deficits for four consecutive months through July. If it reports another trade deficit in August, it will be the first time the country registers a trade deficit for five months straight in 14 years.

Consumer prices in Korea soared 6.3 percent in July from a year earlier. It was the fastest increase in almost 24 years. Inflation expectations slightly fell for the first time in eight months in August. People surveyed by the Bank of Korea said they expect consumer prices to rise 4.3 percent over the next year, down from an all-time high of 4.7 percent a month earlier.

"The won is expected to stay weak for some time until there are signs that the United States will control the speed of the interest rate increases," said Yang Jun-sok, economics professor at the Catholic University of Korea. "Though there aren't clear and imminent resolutions, the pressure of the falling won and concerns for the supply and demand for foreign reserves can be reduced from the upswing in exports."

BY JIN MIN-JI, SOHN HAE-YONG [jin.minji@joongang.co.kr]