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Strong dollar fans fear of foreign capital outflow from Korean market

With the Korean won extending its losing streak against the dollar, analysts voiced concerns on Monday that the prolonged trend may trigger an outflow of foreign capital from the local stock market.

The won remained at 1,170 won -- its closing price on Friday -- against the US greenback, which marked the lowest value in 27 months. Korean stocks, bonds and foreign currency markets were closed for a public holiday Monday.

On Friday, foreign investors net purchased shares worth 150.8 billion won ($128.9 million) on the nation’s main bourse, the Kospi, but net sold 880.4 billion won in stock futures the same day, according to the nation’s main bourse operator Korea Exchange. Overall, the Kospi closed 0.74 percent lower from the previous trade at 2,196.32.

“(With the weakening won) foreign investors offloaded stock futures, which dragged down major indexes,” said Seo Sang-young, an analyst at Kiwoom Securities.

“It seems the market reacted more sensitively to the weak won trend, as the momentum that could buoy the stock market is largely absent at the moment,” he added.

A weaker won typically puts downward pressure on Korean stock prices.

Another analyst said the mass sell-off was inevitable, as the foreign investors’ recent buying spree was likely a side-effect of their interest in other emerging-market stocks.

“The offloading in the stock futures market is seemingly caused by an increased cautiousness among foreign investors toward currency losses – if the won continues to weaken against the dollar there is a chance that it may lead to an outflow of foreign capital,” said Lee Kyung-min, an analyst at Daishin Securities.

In order for the local stock market to avoid further weakening, it needs to shake off pressure from the strong dollar, analysts noted, and some upcoming economic announcements may prove to be “game-changers.”

“China and EU nations are expected to release modest economic indicators soon and there is a possibility that the strong dollar trend may come to an end, after economies receive them as a sign of global recovery,” Seo added. 

By Jung Min-kyung (