Black Monday, the Sudden Drop in the FX rate and Stock Index

The won-dollar foreign exchange rate dropped to the lowest low level in 34 months. The concerns that the strong won would undermine Korea`s export destabilized the nation`s financial market, sending the KOSPI below 720-point mark. The domestic economic outlook is grim, as the much-appreciated won is expected to deal a severe blow to price competitiveness of export items.

The won-dollar foreign exchange rate plummeted by 16.8 won on the opening of the Seoul foreign exchange market Monday to close at 1151.2 won. It is the lowest level in 2 years and 10 months since the national currency rose to 1141.8 won against greenback November 17 in 2000.

The drastic drop in the foreign exchange rate is attributable to the declaration adopted by the G7 finance ministerial talks in Dubai, Arab Emirate last week. In the declaration, the countries participated in the conference pledged that they will keep in check the Japanese monetary authorities` market intervention.

As export shares such as Samsung Electronics and Hyundai Motors skidded dramatically on the Seoul stock market, the KOSPI was down 33.36 points or 4.45% to close at 714.89.

The tech-heavy KOSDAK dropped below the 710-point mark, the lowest in four months since it touched 45.63 on May 23.

The KOSPI`s scope of decline on Monday was the largest since it was down by 35.90 on October 10 last year and its rate of decline was the highest since December 30 last year when it was down 4.47%. The number of declining shares was 708, the third largest this year.

The Yen-dollar FX rate went down to 11.37 to finish trading at 112.41 Yen, the lowest since December 27 when the Yen was worth 112.41 against the dollar. The Nikkei declined 463.32 compared to the end of last week to finish trading at 10,475.10 Yen.

Meanwhile, the Ministry of Finance of Economy announced that if the national currency continues to be evaluated highly against the U.S. dollar, it would take various countermeasures including newly issuing foreign currency-denominated state bonds.

An official at the Finance Ministry said, "The sudden increase in the FX rate this time is unacceptable, since it was resulted not from the Korea`s demand for foreign currencies but from the decline in the won-dollar exchange rate. The government will deal with the high valuation of the won using foreign currency-denominated state bonds worth 2.8 trillion won and the capital held by the Bank of Korea. The government could review issuing new state bonds, if necessary."