SEOUL, Sept 20 — South Korea was spotted intervening in derivatives trading and its top foreign exchange official issued a warning today that those betting the won currency was in for a sustained fall could lose money as the Asian country sought to avert any repeat of the capital flight of 2008.
The won fell 1 per cent today to its weakest level in almost nine months against the dollar, Seoul stocks tumbled 1.5 per cent and government bond futures fell modestly as foreign investors kept on offloading their holdings.
The latest selloff was sparked by global markets jitters over the US and euro zone economies, but South Korea’s heavy overseas borrowings and high household debt have made it among the biggest potential victims of the global financial turmoil.
“I think the won has been reacting too excessively (to the global instability) and would eventually face a correction,” Deputy Finance Minister Choi Jong-ku told reporters early today as the won kept on falling.
Choi is the country’s top foreign exchange official and his remark was apparently aimed at warning against betting on the won’s decline. The comment also came soon after traders reported the country of intervening in derivatives market.
The won has fallen nearly 9 per cent in less than two months since touching its 2011 intraday high on August 1 and the Seoul stock market’s benchmark KOSPI is now trading some 20 per cent below its 2011 peak touched in late April.
South Korea has boosted foreign reserves to a record amount of more than US$310 billion (RM930 billion) from around US$200 billion in late 2008 but still carries short-term overseas debt amounting to half the reserves, or twice as high as regional peer Taiwan.
The heavy exposure to short-term overseas borrowing makes the country vulnerable to any credit squeeze in global markets as exemplified by a recent surge in the credit default swaps on South Korean sovereign debt.
The insurance-like derivatives — a measure of investors’ anxiety towards South Korean assets — stood at 158 basis points late yesterday, the highest since the middle of last year and far above a 2011 low of 89 basis points set in January. — Reuters