Won sinks to 28-year low against dollar amid Iran war, foreign stock selling

The won weakened to its lowest level against the dollar in 28 years on a quarterly-average basis in the second quarter, pushed down by a prolonged war between the United States and Iran and a relentless exodus of foreign investors from Korean stocks.

The climb threatens to deepen the strain on Korea's most vulnerable households, as the elevated exchange rate raises the cost of imports and adds to the risk of higher interest rates on top of already rising prices.

The won weakened 19.9 won from Friday's onshore close to be quoted at 1,559.0 against the dollar at the end of overnight trading at 2 a.m. Saturday, data from Seoul Money Brokerage Services showed.

During Friday's overnight session, the last trading day of last week, it weakened to as much as 1,561.5, its weakest intraday level in 17 years and three months. It had last been that weak on March 6, 2009, when the rate spiked to 1,597.0 during the global financial crisis that began in the United States.

The second-quarter average, based on daytime closing prices, came to 1,490.98, the highest quarterly figure since the first quarter of 1998, when it reached 1,596.88, during the Asian financial crisis. The average so far this year, through last Tuesday, stood at 1,477.06, already above last year's record high of 1,420.97. At airport currency booths, the cost of buying dollars in cash reached 1,624 won as of Hana Bank's posted rate Saturday, well past the 1,600-won mark.

Higher oil prices stemming from the war have sharpened risk aversion in the market and pushed the rate higher. Some analysts trace the latest leg up to a remark last month by Kim Yong-beom, chief of the presidential policy office, who described the high exchange rate as "a cost of success that inevitably comes with the Korean economy's leap to a new dimension."

The comment was read as a sign that the authorities would tolerate a higher rate to some degree, adding fuel to its volatility.

The won's slide stands out even among its Asian peers.

So far this month it has lost 3.48 percent against the dollar in the span of a week, a steeper drop than the Japanese yen's 0.65 percent, the Taiwan dollar's 0.55 percent and China's offshore yuan's 0.38 percent. Among major economies, only the Russian ruble, down 3.54 percent, has fallen further.

"Korea is structurally the most vulnerable economy to a breakdown of the global trade order, such as a blockade of the Strait of Hormuz," said Baek Seok-hyun, an economist at Shinhan Bank. "The won's road ahead will not be smooth."

Heavy selling by foreign investors has added to the pressure. They have sold a net 118 trillion won of stocks on the main Kospi market this year, with the daily pace of net selling swelling to about 3 trillion won since the middle of last month. Profit-taking after the Kospi's sharp run-up and moves to trim holdings of Korean shares have combined to drive the outflow.

Many expect the high exchange rate to persist even after the war in Iran subsides. A shift in U.S. industrial policy is drawing more direct investment into the United States, leaving companies inclined to hold on to dollars. Last year, Korea pledged a total of $350 billion in U.S. investment in return for Washington capping tariffs on Korean exports at 15 percent.

"For the companies that have committed to investing in the United States, there is little incentive to convert money into won and bring it home, even if trade has grown sharply," said Jung Yong-taek, an analyst at IBK Securities.

"Once that investment begins, it will generate enormous demand for dollars, and the exchange rate will not come down easily."

The relentless climb has stirred fears that Korea could enter an era of extreme economic polarization, as the high exchange rate lifts import costs and overall price levels and hits vulnerable groups hardest.

Import prices rose 20.4 percent in March and 20.2 percent in April from a year earlier in won terms, the first time the index topped 20 percent in three and a half years. It last did so in September 2022, in the early stage of the Russia-Ukraine war, when Sit climbed 24.2 percent.

Consumer prices rose 3.1 percent last month, the most in two years and two months. A 1 percent rise in the exchange rate lifts consumer prices by about 0.04 percentage point in the same quarter, the Korea Development Institute estimates.

The pain is already showing up in everyday costs. The living-price index, made up of goods that take up a large share of household budgets, rose 3.3 percent last month, its highest in two years and one month. As food, energy and household staples grow more expensive, living costs for vulnerable groups are mounting.

Those price pressures could feed through to higher interest rates and raise households' interest costs as well. In effect, the bill for the "cost of success" Kim described is reaching low-income earners first.

"Through targeted support for the groups most exposed to high inflation, we need to build channels that let the gains of economic growth ripple outward, so that the warmth in the heated part of the room reaches the colder part as well," said Joo Won, head of the research division at Hyundai Research Institute.

BY OH HYO-JEONG [[email protected]]