Korean Won to Take 10 Percent More in Losses to 1,400, CFC Says

By Kim Kyoungwha

Oct. 6 (Bloomberg) -- South Korea's won will lose a further 10 percent against the dollar over the next six months as the credit crisis reduces exports and investors repatriate capital, according to CFC Seymour Ltd. in Hong Kong.

The won, which is already the world's worst-performing major currency this year with a loss of 26 percent, will weaken to 1,400 because the nation will struggle to refinance its short- term debt, CFC's chief investment strategist Dariusz Kowalczyk wrote in a report today. The last time the currency breached that level was in 1998 in the midst of the Asian financial crisis, when the won lost half of its value.

Korea's Kospi index of stocks is down 28 percent this year, headed for its first annual loss since 2002. Investors overseas have sold more of the country's shares then they purchased on all but 13 days since the end of May as the financial turmoil prompted investors to exit emerging market assets. Seven of the 10 most-traded Asian currencies have weakened this year.

``American investors, facing uncertainty at home and difficulty in raising dollar funds, have been pulling back their international investments,'' Kowalczyk said. ``Smart money was beginning to leave'' from the middle of last year,'' he said.

The won slumped 3.7 percent to 1,269 against the dollar as of the 3 p.m. close of local trade, and reached the lowest level since 2002, according to Seoul Money Brokerage Services Ltd. The currency is leading losses in Asia this month with a decline of 5 percent, double that of its nearest counterpart the Singapore dollar, which is down 2.2 percent.

Asian Currency Slump

Asian currencies fell today on signs the global credit crisis is now infecting European banks and on rising concern the world economy is headed for recession despite a U.S. $700 billion bailout. Germany's Hypo Real Estate Holding AG was rescued by the government over the weekend and BNP Paribas SA, France's biggest bank, agreed to take control of Fortis in Belgium and Luxembourg.

The withdrawal of portfolio capital was stimulated by concern that the global slowdown will hurt export-dependent Asia. Weakening external positions has led to declines in most regional currencies, according to the CFC report.

Indonesia's rupiah slumped to the weakest since August 2007 today and the Philippine peso traded near a 17-month low after investors sold stocks on speculation tighter credit will damp demand for Asian goods from the rest of the world.

Net foreign inflows into the equity markets of Japan, Korea, Taiwan, Thailand, Indonesia and the Philippines dropped to just over $3 billion in July 2007 after averaging $12 billion in the first half of that year, Kowalczyk said. The six countries have since seen an outflow of funds, he said.

Currency Signals

Share markets in those countries have all lost more than 30 percent this year.

Asian currencies may see further losses based on the options market, Kowalczyk said.

The premium for risk-reversal strategies involving buying call and put options on the won is at 7.4 percent, the highest among Asian currencies, implying the market is ``much more afraid of weakening of the won than the opposite.''

The rates are negative only for the yen and the Hong Kong dollar, making them the only two currencies that are likely to appreciate, while even the Chinese yuan is also seen as declining, according to the CFC report.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;