Korean won nosedives to lowest level in 17 years as war, stock sell-offs,...

A pedestrian looks at a currency exchange rate displayed in Myeongdong, Jung District, central Seoul, on March 29. [YONHAP]

The Korean won has weakened sharply against the dollar, falling to its weakest level in 17 years as the Middle East war, record foreign stock sell-offs and a stronger dollar combined to pressure the currency.

The won weakened to an average of 1,505.62 won per dollar from Monday to Friday last week, marking its lowest level since the 2009 global financial crisis, data from the Bank of Korea showed on Saturday. On Thursday and Friday, the won remained above the 1,500 level throughout trading, reflecting sustained downward pressure.

The monthly average through Friday stood at 1,489.31 won per dollar, the fourth-weakest level on record, surpassing the 1,488 won seen in March 1998 during the Asian financial crisis.

Heavy foreign selling in the stock market was cited as the primary driver behind the weakening currency. Data from the Korea Exchange showed foreign investors sold a net 30.263 trillion won ($20.06 billion) on the benchmark Kospi market between March 3 and Friday, marking the largest monthly outflow on record.

The sell-off reflects risk-averse sentiment driven by the prolonged Middle East war, concerns over overvaluation in AI and semiconductor stocks and profit-taking following a sharp rally earlier this year. Market volatility was further amplified by what participants describe as the “Trump factor,” as oil prices swung following remarks by U.S. President Donald Trump on a potential strike on Iran.

The won recorded the steepest decline among major currencies this month, weakening 4.72 percent against the dollar. This compares with declines of 2.62 percent for the euro, 2.58 percent for the yen, 1.64 percent for the pound and 0.84 percent for the yuan.

Korean 50,000-won bills are stacked inside a bank in Seoul on Oct. 24, 2022. [YONHAP]

Market attention is now focused on Korea’s inclusion in the World Government Bond Index (WGBI) on Wednesday. The index, compiled by FTSE Russell, is widely used as a benchmark by major institutional investors, including pension funds.

The inclusion is expected to bring in 50 billion to 60 billion dollars in passive funds into the government bond market, more than double the foreign net selling on the Kospi this month. The inflows are seen as a potential stabilizing factor for the won and interest rates.

However, securities firms remain cautious about the short-term impact. Because the funds will be distributed over roughly eight months, their immediate effect on the currency is expected to be limited.

“It may be difficult to expect an immediate sharp drop in interest rates or a reversal to won strength right after the WGBI inclusion," LS Securities said.

Analysts expect the won to remain weak around the 1,500 level for the time being.

“The won is likely to show limited downside below the 1,500 level,” said Lee Jin-kyeong, a senior researcher at Shinhan Securities. “Risk-off sentiment is expected to limit inflows into both equities and bonds for now, making downward pressure on the won unavoidable.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.