The South Korean currency fell to the lowest level in almost 11 months against the U.S. dollar Thursday as the Federal Reserve's head said it would begin to taper its stimulus bond purchases later this year, dealers said.
The local currency closed at 1,145.70 won to the greenback, down 14.9 won or 1.3 percent from Wednesday's close.
It marked the lowest level since July 27, 2012 and the local currency hit an intra-day low of 1,146.60 won at one point during the afternoon trading.
"Emerging countries' currencies slid together, hit by the Fed chief's clear message of quantitative easing (QE) tapering," said Jeon Seung-ji, a currency analysts at Samsung Futures Co. "The won's weakness increased in later session as foreign investors expanded their sales of local stocks and bonds."
Fed Chairman Ben Bernanke said Wednesday (local time) that the U.S. central bank is likely to start slowing the pace of its $85 billion monthly bond purchases later this year as the U.S. economy is improving.
Bernanke said that the Fed could end the stimulus program by mid-2014 after continuing to gradually scale back the pace of the purchase if the recovery of the U.S. economy meets expectations.
Since late May, growing speculation over the Fed's stimulus pullback has made the global financial markets undergo high volatility. In particular, emerging markets have been bearing the brunt of the QE tapering speculation as liquidity spurred by advanced economies' QE moves has sparked rallies in riskier assets so far.
The Dow Jones industrial average fell 1.35 percent on Wednesday and benchmark 10-year U.S. Treasuries jumped to a fresh 15-month high of 2.37 percent.
Taking a cue from the Wall Street losses, Korea's key stock index KOSPI fell 2 percent to end at 1,850.49 points, the lowest closing since Aug. 3, 2012.
Korea's bond market was also hard hit with three-year treasury bond futures sharply declining on foreigners' selloffs, experts say.
"The local bond market showed an excessively sensitive reaction to Bernanke's comments in a situation where investors priced in a low chance of the Korean central bank's further rate cut this year," said Kong Dong-rak, a fixed-income analyst at Hanwha Investment & Securities Co.
The government sought to mitigate jitters over negative impacts that the U.S. move to scale back its bond repurchase program could have on its financial market and the overall economy, saying that it has already mapped out plans to effectively respond to any future developments.
"We have prepared scenarios with which we can cope with exit strategies being reviewed by advanced countries under every possible economic circumstance," a ministry official said on the condition of anonymity. "The U.S. Fed's overnight announcement is one of our expected scenarios."
The Financial Services Commission, the financial regulator, said it plans to hold an emergency meeting with its policy implementing body the Financial Supervisory Service next week to discuss impacts of the Fed's tapering on the local financial markets.
Market analysts said that the local currency is expected to be under downward pressure per the greenback, but the won is not likely to undergo a steep weakness, given Korea's relatively good economic fundamentals.
"The Korean won is likely to be on the gradual decline as a possibility of capital outflows is seen as low. After market turmoil eases, investors may resume their purchases of currencies in sound emerging nations selectively," said Jeon at Samsung Futures. (Yonhap News)
