Recession fears bring Korean won to weakest point in 2 years

Posted on : 2022-04-28 17:43 KST Modified on : 2022-04-28 17:43 KST
Supply chain issues stemming from China and the war in Ukraine, coupled with US austerity rattled the markets
A monitor at KEB Hana Bank’s dealing room in Seoul displays the won-to-dollar exchange rate at the end of trading on April 27. (Yonhap News)
A monitor at KEB Hana Bank’s dealing room in Seoul displays the won-to-dollar exchange rate at the end of trading on April 27. (Yonhap News)

South Korea’s financial market faltered yet again amid resurgent concerns of an economic recession. With the US poised to implement intensive austerity measures and the negative effects of the war in Ukraine multiplying, China’s expansion of its COVID-19 lockdown aggravated the market in South Korea further.

On Wednesday, the won-to-dollar exchange rate at Seoul’s foreign exchange market closed at 1265.2 won after jumping by 14.4 won from the previous day — signifying a swift decline in the won’s comparative value. This was the highest the figure has been since March 23 of 2020, when it shot up to 1266.5 won amid the shock of the COVID-19 pandemic that had just begun.

The recent strengthening of the dollar is an effect of increased demand for low-risk assets. The US dollar index, which measures the dollar’s value relative to six major foreign currencies, surpassed 102, its record in the Asian market, two years since the record was set.

Russia threatening to cut gas supplies to Poland and Bulgaria unless they paid in rubles was another factor that shook up the foreign exchange market. Russia’s move is being considered a de facto declaration of an energy war with Europe, and the euro’s value has been plummeting since, reaching a five-year low.

Kim Dae-jun, a researcher at Korea Investment & Securities, pointed out that “Bank of Korea Governor Rhee Chang-yong stating that the won’s depreciation rate has not been so big, relatively speaking, has been interpreted as a toleration of the current exchange rate level, hastening the won’s weak streak.”

Projections that the US Federal Reserve Board will increase its standard interest rate by 0.5 percentage points during its monetary policy meeting scheduled for May 3 to May 4 are now being considered as fact. More and more experts are predicting that the Fed will raise its standard interest rate by 0.5 percentage points multiple times, including in June and July, in order to cool down inflation, which has renewed concerns of an economic downturn.

Germany’s Deutsche Bank stated in a report it released Wednesday that “the Fed is further behind the curve than it has been since the early 1980s,” warning that the US economy may be pushed into a “significant recession” by late next year. The US Treasury bond yields, which had been seeing a steep increase, plunged amid concerns of an economic recession.

The fact that China’s COVID-19 lockdown has expanded into certain areas within Beijing fanned worries that the world economy may slow down, as it may successively impact the international supply chain, already facing setbacks due to the war in Ukraine.

Projections that an economic slowdown is inevitable in South Korea are surfacing one after the other as well. According to reports by seven foreign organizations gathered by the Korea Center for International Finance, private consumption in the country is expected to rebound following the lifting of social distancing measures, but exports — the driving force behind growth during the first quarter — will face greater risks of falling due to external uncertainties.

Concerns about the economy led to cautious attitudes towards corporate performance. On Wednesday, the KOSPI closed at 2639.06, having dropped by 1.1% (29.25 points) from the previous day. Though the figure fell to 2615 earlier in the day, it rallied after the Chinese stock market rebounded. Foreigners sold 335 billion won worth of Samsung Electronics stocks, which sunk to 65,000 won per share after tumbling by 1.1%.

Earlier, optimism for corporate performance faltered in the New York stock market as well, with the technology stock-centered NASDAQ index plunging by 3.95%. Of note, Tesla shares nosedived by 12.2%, while shares of Google’s parent company Alphabet Inc. plummeted by 6.1% during after-hours trading after the company announced its performance for the first quarter that didn’t meet expectations.

Experts say the won will continue to weaken for a while, as there’s a high chance that South Korea may experience a trade deficit for two consecutive months, and as the difference in interest rates between the country and the US is bound to fall. Heated inflation leading to strong belt-tightening leading to an economic slowdown is a trend inevitably weighing down the stock market.

Byeon Jun-ho, a researcher at IBK Securities, said that “the KOSPI can crash to 2400,” as “high inflation and jumping interest rates will bring about low consumer confidence, heightening uncertainties in the global economy.”

Jeong Myeong-ji, who leads the investment information team at Samsung Securities, said on the other hand that “the KOSPI’s supporting line is 2600, the level the index maintained [in February] when belt-tightening and the outbreak of war occurred at the same time.”

By Han Gwang-deok, finance correspondent

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