KRW at weakest vs USD since crisis times draws crisis-like response from Seoul authorities

2022.09.23 13:59:46 | 2022.09.23 14:32:20

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The Korean won is performing at its weakest since 1997 Asian liquidity crisis and 2008 global financial crisis to build a crisis-like ambience for South Korea as the downside for the local currency is deepening from widening trade deficit and coupling with the Chinese yuan, although foreign exchange reserves are relatively robust compared to the past.

The Korean won fell 15.5 won to close at 1,409.7 won against the U.S. dollar on Thursday and is sliding further Friday. The 1,400 won range has been visited for the first time since 1,422 won closing on March 31 2009 in the wake of Wall Street meltdown.

Although the global-wide strengthening of the greenback cannot be helped, authorities and market participants fret the similarities in the conditions during the last two major crises. Korea is relatively safe with robust FX reserves and sounder financial institutions, but a lengthy weakening trend could worsen the prospects.

The won’s weakening owes largely to the strong dollar at multi-decade highs against currencies around the world on fast rate rises in the world’s largest economy and global economic uncertainties. The widening trade deficit in the commerce-reliant economy and interest gap with the U.S. also feed to the downside.

Analysts project the won could go as far as 1,500 won versus the U.S. dollar in the fourth quarter to worsen inflation and revenue outlook for the economy.

“The Fed has raised rate projection to 4.4 percent for the year-end, and the euro and yuan are not strong enough to buck the strong dollar trend,” said Min Kyung-won, a researcher at Woori Bank.

“The trust in the won also has been shaken on widening trade deficit and weakening in chip exports,” said Seo Jung-hoon, a researcher at Hana Bank. “The won could fall to 1,450 won in short term.”

Experts at home and abroad generally agree the currency level won’t invite liquidity crisis.

During the global financial crisis, local lenders suffered a severe liquidity crunch as they were unable to borrow foreign currency of all forms. The Ministry of Economy and Finance at the time took measures such as by supplying more than $10 billion in foreign exchange swap market via foreign exchange equalization fund.

“Banks were unable to obtain dollars in the market due to credit crunch during the global financial crisis,” Min said. “There is no sense of liquidity shortage at the moment.”

“What is a worry is a fear factor due to the unprecedented conditions,” he added.

The Korean won fell to as low as 1,999 won against the U.S. dollar in 1997 and to 1,597 won amid financial meltdown in 2008.

But at the times, Korea still kept up making dollar revenue through trade.

Korea registered a trade surplus of $2.2 billion in December 1997 and $3.97 billion in March 2009. Deficit streak this year has stretched to the six month, nearing $30 billion as of Sept. 20.

The widening gap between Korea and U.S. base rates is another worry.

U.S. rates that began lifting from zero territory in March have reached 3-3.25 percent this week, above 2.50 percent in Korea, although rises have kicked off in August last year.

The Bank of Korea inevitably would have to speed up by delivering the second hike in 50 basis points after the first-ever raise beyond 25 basis points in July in upcoming meeting in October. Still it cannot afford to match U.S. bigger steps, given the colossal private-sector debt that overwhelms gross domestic product.

Finance Minister Choo Kyung-ho on Thursday vowed to take “all possible means”, but its options are limited.

Authorities carried out their largest intervention since crisis times, dumping dollar supplies of nearly $2 billion on Thursday and Friday last week when the dollar neared 1,400 won and ordered banks to report dollar bids on hourly basis.

“The next defense line by authorities will be 1,450 won, but as fighting inflation is more urgent, high dollar exchange rate and interest rate environment will have to be endured to some extent,” said one foreign exchange expert.

By Shin Chan-ok, Seo Jung-won, Shin Hye-rim, and Lee Eun-joo

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