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Strong dollar deepening woes for Korea

October 2, 2014
A dealer works in the deal room of the Korea Exchange Bank in Seoul, Thursday, as signboards show the KOSPI ending at 1976.16, the lowest level in 3 months, and the dollar trading at 1,061.40 won. (Yonhap)

A dealer works in the deal room of the Korea Exchange Bank in Seoul, Thursday, as signboards show the KOSPI ending at 1976.16, the lowest level in 3 months, and the dollar trading at 1,061.40 won. (Yonhap)

By Choi Kyong-ae

The strengthening dollar is having a multi-pronged impact on the Korean economy, along with capital outflow and a weaker yen that are both poised to pick up speed, economists and analysts said Thursday.

“The dollar’s recent gains against the won have pushed foreigners to sell Korean shares in a capital outflow from the country,” said Hyundai Futures foreign-exchange analyst Lee Dae-ho.

“Foreign investors seem to be reorganizing their portfolio, seeking to invest in stable assets such as the dollar from risky ones in emerging markets,”

Foreigners were net sellers of domestic shares worth 1.54 trillion won ($1.5 billion) from Sept. 11 through Thursday. Their net selling helped send the Korea Composite Stock Price Index (KOSPI) to below 2000 on Wednesday for the first time in two months.

The value of Korean stocks and bonds will fall if the dollar continues to rise against the won, so foreigners have turned to net sellers to avoid additional losses from their investments in Korea, Lee explained.

But net selling by foreigners is not the only significant factor; the yen’s weakness also matters.

“As the pace of the yen’s weakening against the dollar is far steeper than that of the won’s depreciation against the greenback, [the shares of] Korean exporters may fall further amid concerns of worse-than-expected earnings for the third quarter ended Sept. 30 and slowing growth in China,” Lee said.

Samsung Electronics is expected to post at the upper end of 4 trillion won for its third-quarter operating profit, far lower than the market’s previous forecast of 5 trillion to 6 trillion won. Its operating profit guidance will be available on Oct. 7. The tech giant posted an operating profit of 7.19 trillion won in the second quarter.

On Thursday, the broader KOSPI fell further to 1976.16 from 1991.54 a day earlier. Samsung Electronics declined 1.3 percent to 1.14 million won, with Hyundai Motor losing 4.5 percent at 180,000 won, SK Corp. plunging 6 percent to 172,000 won, and Hyundai Heavy Industries shedding 5.6 percent to 125,500 won.

A weaker yen gives Japanese exporters room to cut prices in order to woo overseas customers or earn more when their dollar-denominated overseas earnings are converted into yen.

“The real concern for now is a weaker yen,” said KDB Daewoo Securities fixed-income analyst Dave Byun. “An immediate solution could be a rate cut (by the Bank of Korea) to allow the won to match the yen in terms of the pace of weakness against the dollar,”

Economists expect the central bank to cut the benchmark interest rate by 0.25 percent to 1.75 percent this month and by another 0.25 percent in November or December to support the export-oriented economy.

“A rate cut could have a side effect such as inflation, but it seems to be the right approach because the won needs to move in line with other currencies that weaken against the dollar,” said Korea Investment & Securities economist Jun Min-kyu.

He expected the dollar to remain strong against major currencies because the U.S. Federal Reserve was widely expected to raise the interest rate in the second quarter of next year after wrapping up its quantitative easing programs this month.

The dollar traded at 1,061.40 won, and 108.87 as of 3 p.m. Thursday.