Won-dollar exchange rate tops 1,430 as S. Korean stock markets plunge 3%-5%

Posted on : 2022-09-27 17:35 KST Modified on : 2022-09-27 17:35 KST
The unrelenting climb in the US dollar’s value has roiled financial markets across the world
Monitors in Hana Bank’s dealing room in downtown Seoul display KOSPI and won/dollar exchange rate figures on Sept. 26. (Yonhap)
Monitors in Hana Bank’s dealing room in downtown Seoul display KOSPI and won/dollar exchange rate figures on Sept. 26. (Yonhap)

The won-to-dollar exchange rate surpassed 1,430 won in one fell swoop, barreling upwards with no end in sight. The growing global strength of the dollar due to factors such as the UK government’s plans for large-scale tax cuts factored into the exchange rate’s upward climb. Financial markets all over the world fell into turmoil, and the KOSPI and KOSDAQ fell by roughly 3.0% to 5.0% as well.

The won-to-dollar exchange rate at the Seoul foreign exchange market closed at 1,431.3 won on Monday, having jumped by 22.0 won from the previous trading day. The figure is a record high since March 16, 2009, when, during the global financial crisis, the won-to-dollar exchange rate closed at 1,440.0 won.

The exchange rate opened at 1,419.0 won and reached 1,420.0 won almost immediately once trading started, after which it continued to shoot up, trading at 1,435.4 won at one point during the day. This was influenced by the continued strength of the dollar globally. The dollar index, which entered the 113 range on Friday (local time), continued to grow on Monday as well, reaching a high of 114.4 during the day, a 20-year record.

The stock market was shaken up as well. The KOSPI closed at 2,220.94 on the same day, having fallen by 69.06 points (3.02%). The KOSPI fell below 2,300 the day after the US Federal Reserve raised its standard interest rate by 0.75 percentage points, taking a “giant step,” and is looking like it may drop below 2,200 anytime soon.

The stock market slumped primarily due to individual investors. While individual investors and foreigners recorded net sales of 245.6 billion won and 3.6 billion won, respectively, organizations bought up 280 billion won in stocks.

The KOSDAQ also plummeted to 692.37, having dropped by 36.99 points (5.07%), falling below 700 for the first time in two years and three months. Interest rates for treasury bonds increased, indicating declining bond prices. The three-year treasury yield went up by 0.349 percentage points, recording 4.548% a year.

The increased strength of the dollar that day — and the corresponding weakness of the won — was attributed to the effects of the UK’s fiscal package announcement.

On Friday, the UK Treasury announced a policy plan with tax cuts described as the largest in 50 years, including a partial lowering of the income tax rate. The Treasury itself estimated that taxes would be reduced by 44.8 billion pounds through 2027.

“The danger is in choking growth [through the government’s failure to take action],” said Kwasi Kwarteng, who serves as the head of the central bank, adding that was more coming on the heels of the Treasury’s announcement.

Kwarteng explained that the measures would ease inflation by helping to shore up the economy as household energy expenditures are reduced.

The market’s response was a different story. Shortly after the announcement, the value of the pound fell below US$1.09, its lowest level in 37 years. The interest rate for UK two-year government bonds, which had passed 4% per annum on Friday, rose to 4.53% shortly after markets opened Monday.

The drop in the price of bonds reflected the expectation that more of them will be issued owing to the tax cuts.

Also factoring in were fears that the central bank will need to raise the interest rate further if the economic stimulus measures cause additional inflationary pressures by stimulating aggregate demand. The UK National Institute of Economic and Social Research predicted that the central bank will now need to raise the policy interest rate to 5% per annum to rein in prices.

The weakness of the euro and Japanese yen have also contributed to driving up the dollar’s value. Market observers interpreted the decline in the euro’s value as a result of exit polls showing an almost certain victory for the far right in Italy’s general election Sunday.

After Bank of Japan Governor Haruhiko Kuroda declared on Monday that Japan would not be raising its interest rate for the time being, the exchange rate topped 145 yen to the dollar for the first time in 24 years during trading on the Tokyo exchange market.

As financial and exchange markets around the world have been plunged into uncertainty, the “verbal intervention” by South Korea’s exchange authorities has done nothing to stop the exchange rate from rising.

Appearing Monday morning before the National Assembly Strategy and Finance Committee, Bank of Korea Governor Rhee Chang-yong said, “If the herd phenomenon on the foreign exchange intensifies to the point where the won-to-dollar exchange rate becomes too divorced from our economy’s fundamentals, we will take timely steps to implement market stabilization measures based on the contingency plan we have prepared.”

The exchange rate continued to rise even after Rhee’s remarks, passing 1,430 won to the dollar at around 1 pm.

Early Monday morning, First Vice Minister of Economy and Finance Bang Ki-sun held an emergency economic response task force meeting.

“I have asked that every preparation be made for exchange authorities to directly purchase shipbuilding company futures if necessary,” he affirmed.

Recently, exchange authorities have put forward plans for establishing a currency swap arrangement with the national pension and encouraging shipbuilding company futures purchases. The aim is to bring the exchange rate down by reducing the demand for dollars and increasing supply in the exchange market.

By Lee Jae-yeon, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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