Won breaks 1,540 per dollar for first time in 17 years as foreign investors flee

The won-dollar exchange rate surged to 1,549.25 won at 10:28 a.m. Friday, breaching the 1,540-won level intraday for the first time in 17 years as foreign investors accelerated their exit from South Korean markets. The Kospi extended its early losses to more than 6 percent, coming within striking distance of the 8,000-point threshold, while the Kosdaq tumbled more than 5 percent to fall below 1,000. Monetary authorities said they would sharpen their vigilance against excessive volatility, but market anxiety showed little sign of easing.

The won opened at 1,529.0 won against the dollar Friday, down 0.7 won from the previous day's closing price on the Seoul interbank market, but crossed 1,540 won around 9:50 a.m. — a swing of roughly 11 won in less than an hour. The rate then climbed to 1,542.6 won at 10:06 a.m., 1,546 won at 10:17 a.m. and 1,549.25 won at 10:28 a.m., threatening the 1,550-won mark. That is the highest level since March 10, 2009 — during the global financial crisis — when the rate hit 1,561.0 won intraday.

Markets are focusing on foreign capital outflows as the primary driver of the won's recent weakness. As of 10 a.m. Friday, foreign investors had net sold 1.4567 trillion won (approximately $953 million) worth of shares on the main bourse. Institutional investors added to the selling pressure, offloading 346.9 billion won worth of shares. Retail investors absorbed the supply, posting net purchases of 1.71 trillion won.

According to Korea Exchange, the Kospi stood at 8,078.73 as of 10 a.m. Friday, down 560.68 points, or 6.49 percent, from the previous session. The index opened at 8,323.20, already down 316.21 points, or 3.66 percent, before sliding as far as 8,069.43 intraday — a decline of 6.60 percent. Korea Exchange activated a sell-side sidecar on the main market at 9:08:25 a.m.

The Kosdaq also fell below 1,000. As of 10 a.m., the index stood at 996.73, down 53.00 points, or 5.05 percent, from the previous session, after touching an intraday low of 998.40. On the Kosdaq, both foreign and retail investors were selling. Foreign investors net sold 75 billion won worth of shares, while retail investors sold 21 billion won worth. Institutional investors were net buyers, picking up 98.5 billion won worth.

According to KB Kookmin Bank, the correlation coefficient between cumulative net purchases of domestic shares by foreign investors and changes in the won-dollar exchange rate over the past year stood at minus 0.64 — meaning the more foreigners sold Korean stocks, the weaker the won became and the higher the exchange rate climbed. During that period, foreign investors net sold roughly 100 trillion won worth of shares, and the won-dollar rate rose by more than 100 won.

"Not all proceeds from stock sales immediately translate into demand for dollar conversion, but as net selling accumulates, the demand for dollars to repatriate funds inevitably grows," said Lee Min-hyuk, an economist at KB Kookmin Bank. "This can amplify upside volatility in the exchange rate during a period of elevated rates." He added that the recent decline in global oil prices and a partial recovery in risk appetite have eased some dollar-strengthening pressure, but said whether foreign capital returns to Korean markets remains the key variable for exchange-rate stability.

Repeated verbal interventions by currency authorities appear to be losing their effect on markets. The Japanese yen also crossed 160 per dollar despite verbal warnings from Japan's prime minister and finance minister. Shin Se-don, a professor of economics at Sookmyung Women's University, said both South Korea and Japan maintain interest rates below those of the United States, creating structural pressure for capital outflows. Without a change in monetary policy, he said, market intervention by currency authorities alone is unlikely to reverse the trend in either country.

Some analysts warn the exchange rate could remain above 1,500 won for an extended period. "Even if Middle East risks subside and the large-scale foreign stock selling runs its course, the exchange rate will not fall easily because of other factors such as investment commitments to the United States," said Jeong Yong-taek, a researcher at IBK Investment Securities.

Deputy Prime Minister and Finance Minister Koo Yun-cheol said Friday the government is responding with particular vigilance to widening volatility in financial and currency markets and the strain on household living costs.

Speaking at an emergency economic task force meeting he chaired at the Government Seoul Complex, Koo said market volatility remains high even as external indicators have been strong — noting that South Korea's current account surplus reached $28.29 billion in April and the cumulative surplus for January through April hit a record high.

He added that the government would work harder to support the livelihoods of ordinary citizens while pressing ahead with structural reforms aimed at achieving a major economic leap forward.

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