Gov't on alert over won's weakening amid Middle East crisis

An electronic board shows the Korean currency trading for 1,474.40 won relative to the dollar at Hana Bank in Seoul, Wednesday. Yonhap

Financial authorities are on high alert over a sharp weakening in the Korean currency relative to the U.S. dollar, officials said Wednesday.

Bank of Korea (BOK) Gov. Rhee Chang-yong postponed his departure for meetings involving the International Monetary Fund (IMF) and Bank for International Settlements (BIS), turning back at the airport so he could preside over a high-ranking BOK meeting.

Minister of Finance and Economy Koo Yun-cheol also said the ministry is closely monitoring movements in the foreign exchange (FX) market.

Minister of Finance and Economy Koo Yun-cheol, left, and Bank of Korea Gov. Rhee Chang-yong attend a policy meeting at the Korea Federation of Banks in Seoul, Friday. Yonhap

The reactions followed the Korean currency depreciating past the psychologically significant 1,500 won per dollar overnight, the first time since March 2009 during the global financial crisis.

The weakening was prompted by fears that the U.S.-Israel military operation against Iran could escalate.

According to market data, the won weakened briefly to nearly 1,506 won per dollar at 12:22 a.m. early Wednesday.

Hours later at 9 a.m., the currency opened at 1,479 won per dollar, down 12.9 won from the previous session. It then hit an intraday low of 1,484 won per dollar.

The won closed at 3:30 p.m. at 1,476.2 won per dollar, down 10.1 won from the previous session.

The central bank said it will closely monitor whether the won is moving excessively out of sync with Korea's economic fundamentals due to heightened external volatility.

“The won briefly weakened past the 1,500 won per dollar level overnight. However, unlike past crises, dollar liquidity remains ample and Korea's external borrowing spreads and credit default swap (CDS) premiums are stable,” the BOK said in a statement.

The finance ministry said FX market monitoring will be strengthened in light of the recent weakness in the Korean won sparked by external shocks.

“We are closely monitoring the currency movements,” Koo said during a parliamentary committee meeting.

Koo indicated no need for a currency swap deal between Seoul and Washington.

“The U.S. considers Korea has sufficient dollar reserves, as indicated by us holding a combined $1 trillion in foreign currency assets, including $400 billion in FX reserves.”

Market analysts say it is unlikely that the won will depreciate to 1,500 won per dollar or weaker for extended periods.

“The recent won weakening is explained by war-triggered strong dollar demands, coupled with large equity selloffs by foreign investors over the past two days,” Standard Chartered Bank Korea strategist Hong Dong-hee said.

“The market will see the figure testing the 1,500 level, but further rapid weakening will be limited, aided by FX authorities’ verbal interventions, market fear peak-out and slowdown in dollar strength in the weeks to come.”