Foreign selling drives won to 16-year low

The Korean won briefly breached the 1,560-per-dollar level in overnight trading Friday, falling to its weakest point since the global financial crisis and prompting authorities to launch a probe into suspected speculative trading and market-disruptive activity.

The won closed at 1,559 per dollar in Seoul's overnight market at 2 a.m. Saturday after touching 1,561.5 during the session, its weakest level since March 2009.

The slide accelerated after the dollar-won rate ended Friday's regular session at 1,539.1, up 9.4 won from a day earlier. Stronger-than-expected US jobs data boosted expectations that the Federal Reserve could resume interest-rate hikes later this year, sending the dollar higher against major currencies.

In response, Finance Minister and Deputy Prime Minister Koo Yun-cheol held an emergency market review meeting on Sunday with the heads of the Bank of Korea, Financial Services Commission and Financial Supervisory Service, issuing a stronger warning after two verbal interventions earlier in the week failed to slow the won's slide.

"While the recent increase in foreign exchange volatility reflects supply-demand factors, such as foreign investors' portfolio rebalancing and profit-taking amid strength in the domestic stock market, some speculative trading has accelerated one-sided moves," Koo said.

He said authorities would inspect suspected speculative or market-disruptive activity and illegal foreign exchange transactions, and that they would take strict action depending on the findings.

The currency slide came as foreign investors continued cutting exposure to Korean equities. The Kospi plunged 5.54 percent Friday to 8,160.59, while foreigners net sold 3.5 trillion won ($2.26 billion), extending their selling streak to 20 sessions and bringing cumulative net sales to about 70 trillion won.

Market participants say the won's slide has gone beyond broad dollar strength or oil prices, with equity rebalancing increasingly spilling into foreign exchange demand.

"The won's depreciation appears excessive even after taking into account heightened geopolitical risks and strong US economic data," said Chun Kyu-yeon, an economist at Hana Securities, noting that the won has fallen the most among major currencies since the Iran war broke out and is now significantly undervalued by real effective exchange rate measures.

Moon Jung-hiu, a senior FX economist at KB Kookmin Bank, tied the pressure more directly to market flows. "Foreign investors' profit-taking in Korean equities appears to be the biggest factor," he said. "Exporters are still selling dollars from sectors such as semiconductors and shipbuilding, but foreign dollar buying appears to be coming in more strongly."

Moon cautioned that equity selling and dollar buying cannot be matched one-for-one because the investors may differ, but said the timing suggests equity rebalancing and custody-related dollar demand are moving together.

According to Hana Securities, foreign investors had net sold nearly 120 trillion won on the main Kospi market this year, yet the market value of their holdings had more than doubled to 2,918 trillion won, as the rally outpaced their selling.

The latest level has revived comparisons with past crises, but Korea's external buffers are much stronger than during earlier episodes. Foreign exchange reserves stood at $426.99 billion at the end of May, down $880 million from a month earlier but safely above levels seen during the 1997 Asian financial crisis or the 2008 global financial crisis.

Exports also remain a buffer. Shipments jumped 53.2 percent from a year earlier in May to a record $87.75 billion, while the trade surplus hit a record $26.95 billion, suggesting the won's weakness is not being driven by a collapse in Korea's ability to earn dollars.

Still, market watchers see the reserve picture as more complicated than the headline figure suggests.

According to Moon, Korea appears to have ample dollars on paper when foreign reserves and net external assets are counted together, but whether that liquidity would be enough to absorb potential outflows is less clear.

"The problem is that much of that money is tied up," Moon said. "Foreign reserves are mostly held in bonds, and net external assets are largely invested overseas. If a crisis actually comes, the amount of short-term dollar liquidity that can be mobilized immediately may not be as large as the headline figures suggest."

For now, experts still see little chance of a quick retreat, with capital outflows and dollar demand likely to keep the won under pressure.

"The market is in a period of heightened volatility, with excessive concentration in semiconductors and related sectors, so it is hard to say the won will not reach 1,600," Moon said.

He saw the currency stabilizing to around 1,500 to 1,520 if stock market volatility eases, while a return toward 1,440 would likely require an end to the war and lower oil prices.

The next test may be whether the Bank of Korea sends a stronger signal beyond its already hinted July rate hike. Moon said such a move to hike rates appears largely priced in.

"The key is what signal the BOK sends with a July hike, and whether it makes clear to the market that the move is aimed at stabilizing the currency," Moon said. "A strongly hawkish signal could help stabilize the won, but a wait-and-see hike may have little impact."