Korean Won sinks to 13-year low, drags Kospi further down

Aggressive moves by the US Federal Reserve to tame the red-hot inflation, at the risk of an economic downturn, were believed to have prompted the sell-off of Kospi by foreigners.

Choi Si-young

Choi Si-young

The Korea Herald



June 24, 2022

SEOUL – The South Korean won slipped below 1,300 per US dollar for the first time in 13 years in onshore spot trading Thursday, breaching the key psychological threshold as recession worries boosted the dollar’s safe-haven appeal.

The won weakened 0.35 percent from the previous session to 1,301.8 per dollar, the lowest close since July 14, 2009, when the won slid to 1,303 during onshore trading hours. The 1,300 mark, last seen in the wake of the 2007-2008 financial crisis, is considered a red flag for the economy.

The main board Kospi fell 28.49 points, or 1.22 percent, from the previous session to close at 2,314.32 Thursday, marking a 19-month low after hitting an intraday low of 2,306.48, also a new 52-week low.

Aggressive moves by the US Federal Reserve to tame red-hot inflation at the risk of an economic downturn were believed to have prompted a sell-off by foreigners, who hold about one-third of Korean stocks. The Fed last week raised interest rates by 75 basis points, its biggest hike in 28 years.

“We are not trying to provoke, and I don’t think we will need to provoke, a recession,” US central bank chief Jerome Powell said Wednesday at a hearing before the US Senate Banking Committee.

A recession was “certainly a possibility,” he said, noting he will be looking for evidence of a slowdown in prices before the central bank eases up on the pace of rate hikes.

Powell, who did not rule out a raise of a full 100 basis points if persistent inflation warrants it, backed steep hikes at the board meetings to come this year, saying the economic outlook will be the key factor affecting the decision.

Meanwhile, Finance Minister Choo Kyung-ho convened an emergency meeting of economic chiefs, where the fiscal chief, who doubles as deputy prime minister, vowed to address increasing market volatility and minimize negative impact from a depreciating won.

“The government will also make efforts to ease demand-supply imbalances in the market,” he said.

Choo has described the economic woes Korea is facing as a “full-blown crisis,” calling for a calibrated approach to avoid a growth slowdown as the government tries to bring down surging prices.

The Bank of Korea warned this week that consumer prices this year could top the 4.7 percent marked in 2008, the highest level in the last 20 years, on rising materials and food costs globally.

At a local forum Thursday, Lee Seung-heon, senior deputy governor of the central bank, signaled the central bank likewise could back a steeper-than-expected rate hike in July when the board meets.

The bank usually changes the rate by increments of 25 basis points, but is emboldened to lift it higher to control soaring prices and prevent capital outflows fleeing for better interest rates in the US. The BOK will fall short of the Fed’s target rate by year-end if it follows the tradition.

“Our mission is to tame prices and for us to do that and prevent instability, we need to be proactive in how we manage our monetary policies,” Lee said.

The BOK said inflation would peak by the third quarter of this year, though its chief acknowledged uncertainties like fallout from Russia’s invasion of Ukraine require him to look at multiple factors for a big-step rate hike.

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