The South Korean won (KRW) is currently Asia's weakest currency, having lost 16% of its value against the US dollar so far. The Bank of Korea is estimated to have spent about US$10-billion defending the won in July of this year. However, some market analysts have hinted last August that the central bank may not anymore intervene aggressively, which spurred speculators into thinking that the government would allow the Korean currency to weaken in order to provide more buffer on its expanding exports.
The market buzz is, thus, capital flight. There have been heavy investment outflows. Foreign investors have sold a net US$23-billion of Korean equities this year.
Last Monday, the won plunged 3% to register a four-year low of KRW1,123.6 versus the greenback. The Korean stock market fell 4.1% to 1,414.43 points, posting its lowest level in 17 months. Bonds also tumbled as the yield on benchmark five-year treasury bonds leaped to its highest level this year at eight basis points to 5.62%. Moreover, consumer inflation hit a seven-year high in May at 4.9% year-on-year.
The situation is like a reminisce of the capital flight seen in the 1997 Asian financial crisis when the won lost half of its value against the US dollar, which had led the country into a full-blown currency crisis.
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