Won breaks 1,300 mark as markets grow volatile on U.S. downgrade

The won broke the 1,300 mark during intraday trading on Thursday, continuing to weaken against the dollar following the historic downgrade of the U.S. credit rating.

Electronic signboards show Korea’s market on Thursday. [YONHAP]

The won broke the 1,300 mark during intraday trading on Thursday, continuing to weaken against the dollar following the historic downgrade of the U.S. credit rating.

The won reached 1,302.5 against the U.S. dollar from 1,298.50 won a day earlier, but closed at 1,299.10.

It was the first time the won has broken 1,300 since July 10.

The won has been stabilizing in recent months, despite the record rate differential between Korea and the United States, which now sits at 2.00 percentage points. It traded at mid-1,200 in July.

The U.S. dollar index, a benchmark used to measure the value of the dollar relative to other currencies including the pound and the yen, rose to its highest level since early July.

Kospi fell 0.42 percent on Thursday, continuing the downward streak from a 1.9 percent stumble a day earlier.

Market volatility followed the historic U.S. credit rating downgrade by Fitch Ratings on Tuesday from the highest AAA to AA+, with the credit rating agency citing “a steady deterioration in standards of governance.”

Fitch is one of the big three credit rating agencies alongside S&P Global Ratings and Moody’s.

An official from Fitch told Reuters that the decision was in part based on a perceived deterioration in U.S. governance, which means there is less confidence in the government’s ability to address fiscal and debt issues.

In 2011, Standard & Poor's dropped the U.S. rating from AAA to AA+ following a prolonged fight over the government’s borrowing limit.

Korea’s finance ministry said the impacts of the recent downgrade will not be severe.

“So far, the market expects the impacts of the [latest downgrade] will not be as significant as it was in 2011 after the S&P [decision],” said Bang Ki-sun, first vice finance minister, in a meeting on Wednesday.

The ministry “will maintain a close cooperative system with related agencies as market volatility inside and outside Korea may grow following an intensified demand for safe assets.”

Bang ordered a strengthened monitoring of the markets with particular vigilance on their volatility .

“The stock market plunged but reactions in the bond and foreign exchange markets are relatively plain,” read a report from Shinyoung Securities released on Thursday. “But short-term impacts need to be monitored.”

Some of the assets in the index funds may be forced to be sold due to the downgrade, the report read, adding that Moody’s downgrade also needs to be monitored.

Fitch’s decision was met with some criticisms.

JPMorgan Chase CEO Jamie Dimon told CNBC on Wednesday that Fitch’s downgrade is “ridiculous” as other countries are rated higher than the United States when they rely on the stability created by the United States and its military.

He added that the revised rating “doesn’t really matter that much” since it is the market that determines borrowing costs, not rating agencies.

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