South Korean won falls prey to fund outflows


The won, which is susceptible to swings in global sentiment, has dropped almost 2% versus the US dollar since the start of the year. It is underperforming all its emerging Asian peers just as global growth bets are gaining traction.

SEOUL: At first glance, the weakness in South Korea’s won is an anomaly. Risk appetite is picking up but the currency is heading south.

The won, which is susceptible to swings in global sentiment, has dropped almost 2% versus the US dollar since the start of the year. It is underperforming all its emerging Asian peers just as global growth bets are gaining traction.

Fund flows may explain why. Domestic investors bought a net US$6.2bil of overseas bonds and stocks in January, a record in data from the Korea Securities Depository dating back to 2011. Foreign money managers also offloaded a net US$5.3bil of local stocks in the last week of January, the biggest outflow for the period since 1999.

“Abundant liquidity, a reduction in domestic investment options due to tighter real estate regulations and a pursuit of returns without a cap are driving South Koreans to invest abroad, ” said Kim Dong Young, a general manager of the currency trading team at Mirae Asset Daewoo Co.

Kim estimates that demand for the greenback arising from overseas investments may total as much as US$50mil to US$100mil daily.

The won’s weak spell is likely to be a relief for policymakers and manufacturers who have complained that the currency is too strong. But even at the current level of around 1,107 per US dollar, the won continues to exceed exporters’ pain threshold of 1,133.

Still, the currency’s weakness may be fleeting. Global funds are returning to the nation’s equity market, scooping up US$1.1bil of shares so far this month after withdrawing over US$5bil in January.

Stocks have a fairly close correlation with the exchange rate. The benchmark Kospi index was responsible for about 43% of weekly fluctuations in the US dollar-won exchange rate in the past two years, a Bloomberg study shows. — Bloomberg

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