South Korea’s won fell the most in 16 months after foreign investors stepped up sales of the nation’s stocks and the yen’s weakness fanned concern policy makers will intervene to support exports.
Overseas funds sold more of the nation’s equities than they bought today following net sales of $457 million on Jan. 25, the biggest reduction in their holdings since November 2011, exchange data show. Korean officials hinted last week that they would boost measures to curb gains in the won, which strengthened 8.3 percent in 2012 and touched a 17-month high on Jan. 15. The yen today reached its weakest level in 2 1/2 years versus the dollar. South Korea’s government bonds declined.
“Investors were shorting the dollar after continued selling of stocks by foreign funds increase demand for the dollar,” said Han Sung Min, a currency dealer at Busan Bank in Seoul. “There seems to be no ceiling as to where the won-dollar rate could reach.”
The won tumbled 1.7 percent to close at 1,092.63 per dollar in Seoul, its biggest loss since Sept. 26, 2011, according to data compiled by Bloomberg. It fell 1.6 percent last week, the most since May, and has retreated 2.6 percent so far this month. The yield on the government’s 2.75 percent bonds due September 2017 rose two basis points, or 0.02 percentage point, today to 2.84 percent, Korea Exchange prices show.
Finance Minister Bahk Jae Wan said last week won appreciation had been too steep and the government was “all ready” for new measures to address this. Central bank Governor Kim Choong Soo said Jan. 14 the nation will take an “active” response on the won if needed. Measures to slow the won’s appreciation could include “smoothing operations,” Kim said, adding authorities should act to normalize the exchange rate.
Sharp fluctuations in foreign capital flows are a key concern, given the country’s reliance on trade, Ha Sung Keun, a board member of the South Korean central bank, told reporters in Seoul today.
Samsung Electronics Co., South Korea’s biggest exporter, said last week a stronger currency may cut 2013 operating profit by more than 3 trillion won ($2.8 billion). Appreciation is expected to continue for the “time being,” Robert Yi, Samsung’s senior vice president, said on a conference call on Jan. 25, after announcing fourth-quarter earnings.
Hyundai Motor Co., the nation’s biggest automaker, reported last week a 5.5 percent drop in profit for the fourth quarter, a period in which the won led gains among major currencies with a 4.5 percent advance. “The magnitude of the won’s appreciation will probably intensify toward the second half of this year,” Chief Financial Officer Lee Won Hee said in a Jan. 24 conference call.
South Korea last year tightened limits on use of currency forwards by banks as won gains threatened exports. From Dec. 1, positions at overseas lenders were capped at 150 percent of equity, down from 200 percent previously. The ceiling for domestic banks was cut to 30 percent from 40 percent.
Tensions with North Korea are helping weaken the won, which today fell for a fourth day, the longest losing streak since August. The North’s leader Kim Jong Un vowed to defend his country against hostility from the U.S. after the totalitarian state said last week it planned to test a nuclear weapon. Kim supported government statements that “powerful physical countermeasures would be taken to defend” the dignity and sovereignty of the nation, the official Korean Central News Agency said in a report yesterday.
“Concern that authorities will introduce regulations to stem currency appreciation on top of continued fund outflows are keeping the won weaker,” said Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul. “The yen’s decline is also weakening the won. Investors also remain worried about geopolitical risks on North Korea’s nuclear test.”
One-month implied volatility in the won, a gauge of expected moves in the exchange rate used to price options, surged 200 basis points today to 8.63 percent. That’s the biggest jump since November 2010.
One-month non-deliverable forwards in the won slumped for a fourth day, falling 0.9 percent to 1,093.39 per dollar, according to data compiled by Bloomberg. The currency will appreciate to 1,050 per dollar by the end of June, according to the median of 29 forecasts in a Bloomberg News survey. Three months ago, the expectation was for an exchange rate of 1,100.