South Korea’s policymakers warned movement in the won has been “excessive” and said they would take any necessary action to curb volatility that has driven the currency to its lowest level in more than five years.
The South Korean Ministry of Strategy and Finance and the Bank of Korea said in a text message that they are concerned about “herd behavior” in the market. The won strengthened about 0.9 percent within minutes of the news.
The won had fallen recently on speculation the central bank might lower interest rates further and as capital outflows from emerging markets including South Korea have accelerated amid global risk aversion. Rising tensions with North Korea have also damped the attractiveness of South Korean assets.
Photo: AP
“Verbal intervention tends to have only a short-term impact, but if followed up with actual intervention, it can have more of an effect,” Australia and New Zealand Banking Group Ltd Singapore-based senior currency analyst Khoon Goh said.
While weakness is often seen as beneficial to the competitiveness of South Korean exporters, the rapidness of depreciation is unsettling to South Korean policymakers.
Central bank Governor Lee Ju-yeol said after holding the key interest rate unchanged this week that capital outflows were expected to last for some time and that the bank would take action if needed.
Global investors withdrew US$2 billion from South Korea’s bond market this month through Thursday, while selling a net US$453 million of equities through yesterday.
The won earlier depreciated to as low as 1,239.59 against the US dollar, the weakest since June 2010. It weakened 0.6 percent yesterday to close at 1,234.36 as of 3pm in Seoul. The won has fallen 5 percent against the dollar this year, making it the worst performer among Asian currencies.
There were “strong” dollar selling orders seen when the won traded near 1,239 and 1,234 against the dollar, which looked like a smoothing operation by authorities, according to a Seoul-based trader who declined to be named.
“The weakening trend will persist in the foreseeable future,” said Hyundai Futures Corp Seoul-based currency analyst Lee Dae-ho, who predicts the won will drop to 1,250 per dollar by the end of next month. “There are more factors to push the won down, including expectations for a rate cut and risks related to North Korea.”
The ministry and central bank also performed a joint verbal intervention in July 2014 when the won was rapidly appreciating.
Global investors have pulled US$2.8 billion from South Korean stocks this year and sold a net US$1.6 billion of won-denominated bonds. Five of 24 analysts surveyed by Bloomberg are forecasting a rate cut next month. The won is to drop to 1,238 per dollar by the end of the year, according to the median estimate in a separate Bloomberg survey.
Government bonds rose this week, pushing the yield on the notes due December 2018 down four basis points to an unprecedented 1.44 percent, Korea Exchange prices show. The 10-year yield fell three basis points from Feb. 12 to 1.79 percent, two basis points off a record low reached last week.
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