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Won hits a new year-to-date low of 1,154 won
By Lee Kyung-min
Korea's currency is expected to weaken for the time being, due mostly to reduced investor appetite for risk brought on by the rapid spread of the coronavirus Delta variant, a reason for tumbling bond yields amid sudden high demand for safe assets, according to market analysts and economists, Wednesday.
Putting further downward pressure on the local currency against the U.S. dollar is investors seeking to limit losses incurred by unstable exchange rates and cut risk asset exposure, as indicated by foreign traders net selling nearly 3 trillion won ($2.5 billion) of shares on the local stock market in July.
The rapid depreciation of the currency will slow once vaccination efforts pick up and the fourth wave of virus spread comes under control. Yet uncertainty will never entirely clear away over how far the virus can exacerbate currency volatility, with the degree of growth prospects and inflation concerns closely and almost solely tied to the containment measures.
"The Korean won is on a downtrend, as opposed to the U.S. dollar increasingly favored by investors in times of uncertainty," Korea Standard Chartered Bank's Korea investment strategist Hong Dong-hee said.
The won closed at a year-to-date low of 1,154 won against the dollar, Wednesday, down 5 won, or 0.44 percent from a day earlier.
This was a last-minute sharp depreciation, since the figure rose to an intraday high of 1,147 won around 9 a.m., leading market participants to judge that it was taking a breather from the weeks-long sharp deprecation.
It stood at 1,152.7 won against the dollar, Tuesday, hitting a new low for the fourth time, year-to-date. The previous low was 1,151.9 won, July 14, which came only about a week after it hit 1,150 won, July 9. The figure was further down from 1,146 won, July 8, when it recorded a four-month low.
The downtrend over the past week was explained in part by the U.S. financial market tumble, as illustrated by the Dow Jones 30 industrial average closing at 33,962.04, Wednesday (local time), down 725.81 points, or 2 percent, from the previous session. This was the sharpest drop since last October.
The S&P 500 index closed at 14,274.98, also down 68.67 points, or 1.59 percent, from the previous session, whereas the tech-heavy Nasdaq dipped 152.25 points, or 1.06 percent.
The investment sentiment reflected reports from the U.S. Centers for Disease Control and Prevention which said COVID-19 is "becoming a pandemic of the unvaccinated." The assessment came as the country averaged about 26,000 cases per day, with hospitalizations and deaths up from the previous week.
The currency volatility will show signs of stabilization when the containment measures take effect, as inferred by last December's figures, according to Hong.
"The local currency depreciated about 20 won amid a new wave of virus spread, but it later rose as the government implemented strict social distancing measures," he said.
It was widely expected that the currency would not dip further than the psychologically significant 1,150 won, given the steady influx of U.S. dollars on the back of robust exports. But Wednesday's figure indicates this could be proven wrong.
"The exchange rate was projected to not top 1,150 won, and exceeding this would have been considered overshooting. But the depreciation could continue well through the third quarter," Hong added.
The key determinant in the currency movement will be the policy stance of the U.S. Federal Reserve, the most critical factor in Korea's monetary policy revisions, according to Seoul National University economist Lee In-ho.
"Which policy stance will be adopted by the Fed will play a key role in price increases, fanning concerns about inflation and whether inflation expectations have peaked," he said.
The won, in his view, will not continue its downtrend for long, with fluctuations likely depending on the increase in caseloads in major countries and the financial market's reaction.
"The virus determines practically all economic and financial indices including growth, inflation and currency exchange rates. Whether and how fast the country achieves herd immunity will set the pace and course of the currency movements," he said.
The local currency is not likely to experience a drop considered to be out of control, as evidenced by the central bank's signal to push ahead with a key rate hike within the year.
"The fundamentals of the country are strong enough for the central bank to consider a rate hike, a reason why the currency plunge will be limited," he added.