S. Korean currency plunges to 57-month low

SEOUL, Sept. 29 (Yonhap) -- The South Korean currency plunged to a 57-month low against the U.S. dollar on Monday after dipping to 1,200 won at one point as offshore investors and importers snapped up the dollar, dealers said.

The local currency closed at 1,188.80 won to the dollar, down 28.3 won from
Friday's close and the lowest level since January 5, 2004, when it finished at
1,192 won against the greenback. The won has lost more than 21 percent versus the
dollar so far this year, putting upward pressure on already-high inflation.
"The won's sharp decline was quite excessive today. The won's weakness came as,
first of all, the dollar globally rallied after U.S. congressional leaders
reached a tentative deal on the government's financial rescue plan," said Jeon
Seung-ji, a currency analyst at Samsung Futures Inc. "Local companies' dollar
demand to cover end-month bills remained strong."
South Korea's currency market has been suffering from a dollar shortage, as banks
and companies are rushing to the safer greenback on concerns over a financial
crisis sparked by the collapse of investment giant Lehman Brothers Holdings Inc.
"Overseas market situations have not got any better. Although prospects of the
passage of the U.S. bailout proposal are said to increase, questions are rising
as to whether the plan is sufficient enough to ease financial jitters," said Oh
Suk-tae, an economist at Citibank Korea Inc.
Investors are cautious about the effect of the U.S. government's proposal to bail
out the financial sector. U.S. lawmakers are set to vote on Monday (local time)
on the government's US$700 billion proposal to buy bad debts in a bid to bail out
the teetering financial sector after congressional leaders reached a tentative
deal early Sunday.
Earlier in the day, South Korea's Finance Ministry said it will take steps to
stabilize the currency, but the market shrugged off the verbal intervention with
the won tumbling to a session low of 1,200 won versus the dollar at one point. It
was the first time the currency dipped to the 1,200-won mark in four years and
nine months.
Toward the market close, the won trimmed earlier losses as foreign exchange
authorities unloaded what dealers estimated to be about $1 billion, they added.
Choi Jong-ku, the finance ministry's international financial division, said that
growing volatility in the local currency market is "excessive" and South Korea
will take necessary actions to stabilize it.
The government said Friday that it will inject at least $10 billion into the
local won-dollar swap market in an effort to calm the turmoil and provide added
liquidity.
An expected trade deficit for September and a shortfall of the country's current
account are also exerting downward pressure on the local currency, analysts said.
The won's heavy losses will likely take a toll more on smaller companies, some of
which have suffered from losses related to currency option contracts called
"knock-in knock-out (KIKO)" options.
KIKO enables companies to sell dollars with a fixed won-dollar rate if the won
moves within a certain range set by the contract. But if the won's value falls
below the band, firms are forced to sell the dollar far below the market
won-dollar rate, incurring heavy losses.
"As the won sharply fell versus the dollar, it may gain some ground as a
technical movement, but the local currency is likely to test the 1,260-won mark
in the short term due to persistent downward pressure on the won," Jeon said.