S.Korea won sheds safe-haven status as Fed taper, China woes spark correction

SEOUL Mon Jan 27, 2014 3:20am EST

SEOUL Jan 27 (Reuters) - After a six-month run of gains, the South Korean won looks set to falter as concerns over additional Fed tapering and worries about China's economy led to its biggest weekly drop in seven months versus the dollar last week.

The won, which had soared to a five-year high just four weeks ago, has seen those gains unravel as offshore investors build long dollar positions. On Monday it ended down another 0.3 percent at 1,083.6 to the dollar after trading as low as 1,087.7 - its weakest since Sept. 13.

"South Korea is starting to re-couple with the global markets," said Hyundai Futures currency analyst Lee Dae-ho. "Now that companies like Samsung Electronics and Hyundai Motor reported weaker fourth-quarter earnings, there are concerns that the fundamentals of South Korea's economy are softening."

Analysts say the dollar-won rate could rise to between 1,095 - around the 200-day moving average - and 1,100 in coming weeks as the greenback continues to gather momentum.

The won was among the best performers in the region during the second half of 2013, benefiting from strong inflows to South Korean markets as the country's strong fundamentals and signs of accelerating growth distinguished it from other emerging markets.

Those fundamentals - a hefty current account surplus, small budget deficit and substantial foreign-exchange reserves - should help shield the won from drastic losses, analysts say.

But further weakening looks inevitable as the U.S. Federal Reserve's unwinding of its bond purchases is seen lifting the dollar and triggering repatriation of funds from emerging markets. Concerns about the global economic outlook are also hitting South Korean firms, dimming the attraction of the won.

Stock market heavyweights Samsung Electronics Co Ltd and Hyundai Motor Co last week reported weaker-than-expected quarterly earnings, though some of this was blamed on the stronger won during the period.

Foreign investors withdrew 1.86 trillion won ($1.7 billion) from South Korean stock markets in December - the biggest outflow since June - and have taken out around 1.4 trillion won worth of funds from the main stock exchange so far this month, according to the latest data.

'MORE GOOD THAN HARM'

Meanwhile, signs of slowing growth in China, such as the flash January Markit/HSBC purchasing managers' index showing a contraction in manufacturing activity, have raised concerns about South Korea's ability to cope with weaker conditions in its biggest export market.

"At this point, external conditions favour the dollar against the won and offshore players such as hedge funds appear to be betting that the dollar has more room to rise," a currency dealer in Seoul said.

The yen's current rebound may heap further pressure on the won. The won is down more than 5 percent against its Japanese peer so far this month, poised to snap six months of gains.

KEB Futures currency analyst Chung Kyung-parl said the unwinding of shorts on the yen-won cross, triggered by a flight to safety, was a key driver in the won's decline.

While Vice Finance Minister Choo Kyung-ho said on Monday that recent market movements warrant close scrutiny, there were no reports of intervention last week. That suggests that Seoul may be inclined to let the correction play out for now without directly defending the won.

The won's ongoing slide will help address concerns about South Korean exporters' price competitiveness against their Japanese rivals, while subdued inflation means there is little risk of stoking higher inflation from the weaker won.

"It seems Korean policymakers have judged that weaker won would do more good than harm in the current macro environment," Young Sun Kwon, Hong Kong-based economist for Nomura, said in a report, adding that he does not expect South Korea to make any direct policy responses in the absence of a "synchronised global growth downturn." ($1 = 1080.3500 Korean won) (Additional reporting by Yena Park; Editing by Chris Gallagher)