Korean market reels from tanking won-dollar rate on looming 'Trump trade'

The Korean economy faces challenges with the won-dollar exchange rate exceeding 1,400, prompting foreign capital outflows and inflation, exacerbated by concerns over Trump's trade policies.

An electronic board at Hana Bank in central Seoul shows the won trading at 1,410.6 to the dollar early Wednesday morning. [YONHAP]

The Korean economy is taking a hit from the surging won-dollar exchange rate, which has contributed to a fresh exodus of foreign capital and inflationary pressure on imported goods, a vicious cycle that some analysts believe could only further deteriorate under U.S. President-elect Donald Trump.

The won continued to depreciate against the greenback on Wednesday, staying above the 1,400-won mark for the second consecutive day. The local currency was trading at 1,406.6 won to the dollar at 3:30 p.m., up 3.1 won from the previous session as it surpassed the psychological threshold of 1,410 won during trading.

Trump's victory in the presidential election last week exacerbated the local currency's fall. In the beginning of the year, the won was trading at 1,300 won, but its value continued to slide to 1,378.6 won on Nov. 5 and further to 1,396.2 won at 3:30 p.m. on Nov. 6 when the former president's victory was widely expected.

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Analysts believe that the weak currency also plays a part in driving down investment sentiment in the local markets, whose main Kospi bourse plunged to a level not seen since this year’s “Black Monday” on August 5.

The Kospi lost 65.49 points, or 2.64 percent, to close at 2,417.08 on Wednesday, lower than Aug. 5’s 2,441.55. The Kospi’s market capitalization also dipped below the 2,000 trillion-won level for the first time since Black Monday.

“The dollar will likely remain in a strong position as there are not many factors that could weaken the currency,” said Wee Jae-hyun, a researcher at NH Futures, adding that a sell-off of local stocks by foreign investors accelerates the already-high won-dollar rate, which in turn triggers an outflow of foreign capital.

Foreign investors net sold 4.4 trillion won in October, maintaining the trend for three straight months.

“Under the current circumstances, where the pound falls and euro weakens, there are no global currencies that can contain the so-called Trump trade,” the researcher said, using a term that refers to big swings in industry and the markets caused by the president-elect's preference for higher tariffs, lower tax rates and lighter regulation.

Min Kyung-won, a researcher at Woori Bank, echoed the precarious conditions facing Korea.

“The dollar strengthened and yuan weakened over the expectation that Trump’s trade policies could hurt major economies including Europe and China,” Min noted. “The won could be greatly burdened under the combination of a strong dollar and weak yuan."

Min predicted that the strong dollar will last due to anticipated demand for the currency from importing companies and retail investors.

Another concerning point linked with the weak Korean currency is the upturn of import prices, which rose 2.2 percent in October, ending a downward trend in the preceding two months.

The Bank of Korea pointed to a combination of rising oil prices and the won-dollar rate as the reasons for the higher import prices.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]