Korean won tipped to face further decline after 5% dip

South Korea's local currency has dropped by one of the fastest rates in the world against the US dollar but may further decline on apparently growing demand for safer assets, data showed Sunday.

The Korean won closed at 1,214.90 won against the greenback Thursday, down 5 percent from 1,154.70 won a month earlier, according to the Bank of Korea (BOK).

The sharp decline was largely attributed to the escalating trade tension between the world's two largest economies -- the United States and China -- that may put additional downward pressure on South Korean exports.

The country's outbound shipments have dropped for eight consecutive months since Dec. They are widely expected to continue shrinking amid the US-China trade dispute, as well as Seoul's own trade spat with Japan.

Tokyo began imposing tougher export restrictions last month on three key materials used to produce semiconductors and display panels, both key export items of South Korea that together account for more than one-quarter of all its exports.

As an apparent result, the value of the Korean won dropped by the third-fastest rate among the currencies of the 10 largest developing countries, including China, India, Russia and Argentina, over the past month.

"The won-dollar exchange rate dropped significantly on a less-than-anticipated easing stance of the US Fed and the escalation of the US-China trade dispute," a BOK official said, while speaking on condition of anonymity.

The US Fed slashed its key rate last month, marking the first rate cut in a decade, but said the rate reduction did not signal the start of a long series of rate cuts, disappointing many who had expected a more aggressive effort from the US Fed to support the world's largest economy.

The won may lose further ground down the road amid an apparent sign of market preference for hard currencies and safer assets that include gold, analysts noted.

"(The won-dollar exchange rate) will likely remain range-bound for the time being but may quickly slide in case of another event," Min Kyong-won, an analyst at Woori Bank, said, adding the rate may drop to as low as 1,245.00 won per dollar.

A Seoul National University professor warned a further decline of the won may create a vicious cycle that triggers a massive outflow of foreign capital.

"The real problem starts when an economic slowdown and drop in the exchange rate take place simultaneously when the investor sentiment is worsened by slowing growth, leading to a decline in the value of the local currency that may prompt foreign investors to pull out their investment due to fears of currency loss, which in turn creates concerns of capital flight, leading to a further decline of the won's value," said professor Kim So-young.

As of end-June, outstanding foreign currency deposits at five major banks here came to $37.9 billion, up from $33.4 billion at end-April and indicating a clear demand for the hard currency.

Last week, foreign exchange deposits jumped more than $820 million from a week earlier, according to the banks.

Amid the growing demand for safer assets, the price of gold traded on the KRX has reached record highs for six consecutive sessions since Aug. 2, closing at 59,550 won ($49.13) per gram on Friday, according to the KRX. (Yonhap)