The South Korean won has strengthened against the U.S. dollar at the fastest clip compared with other currencies in the last few weeks, spawning concerns over a sudden in and outflow of foreign funds, data showed Thursday.
The local currency has soared 4.9 percent to the greenback in the last four weeks, closing at 1,086.50 won as of Wednesday, breaching the 1,100 won mark for the first time since Sept. 29, 2008, according to the Bank of Korea (BOK) and the Seoul foreign exchange market.
The won has climbed at a much faster pace among 30 other currencies of major and emerging countries from April till early this month, the data showed, with the Romanian leu rising 2.59 percent, the Malaysian ringgit gaining 2.58 percent and the British pound ascending 1.49 percent over the same period.
The rapid ascent of the Korean currency is largely attributable to the series of quantitative easing by Japan, which led to a sharp devaluation of the yen currency. Compared with the beginning of last year, the yen fell about 20 percent to the dollar. A stronger won hurts South Korea's exports as it makes local products more expensive than those made by its main rival Japan in the global market.
Analysts noted that the real problem for Korea now is the fluctuation of the currency market, given that the won's rise and the descent of the yen will likely intensify for some time.
That could attract massive inflows of "hot money," a short-term speculative fund, into the local financial market and prompt the won to extend its gaining streak, they said. Also, the rich in Japan might borrow at cheaper costs in their homeland and pour the money into Seoul, triggering a carry trade.
"We've recently seen yen currency forwards positions turning to a net selling mode, which can be regarded as signs of yen carry trades," said Kwon Seung-hyuk, a BOK official.
But analysts also warned that no huge foreign inflow is more fearful than sudden outflows of money, saying that the authorities need to make sure pre-emptive measures to stave off market fluctuations are put in place.
"If we see more yen carry trades, it can lead to an asset bubble, not to mention that companies who borrowed in yen will be hit by huge foreign exchange losses," added Kwon.
Amid growing worries over the negative impact of the yen's fall on the South Korean economy, Asia's fourth-largest, the BOK cut the key rate by a quarter percentage point to 2.5 percent after holding it steady for seven months.
The BOK's move follows the message from the finance ministry to the market on Wednesday, in what could be interpreted as a verbal intervention to stave off market fluctuation, saying "it is closely watching any acts intended to expand volatility unnecessarily in the foreign exchange market."
Since the beginning of this year, the won fell 1.71 percent in January and rebounded 1.32 percent in February before dropping 2.49 percent the next month.
The local currency pared earlier gains in the afternoon session following the central bank's rate cut, changing hands at 1,087.30 won against the greenback as of 2:00 p.m., down 0.8 won from Wednesday's close. Its arbitrage rate against the Japanese yen was quoted at 1,100.97 won, down 3.63 won from the previous session. (Yonhap News)
