U.S. Fed taper decision impacts Korea`s financial markets

Korea`s stock prices and currency value plunged Monday due to adverse global conditions including economic distress in emerging market economies. The U.S. decision to reduce monetary stimulus sent further pressure to already panic-prone emerging economies, to which the Korean financial authorities immediately launched examination of foreign currency liquidity at financial institutions.

On Monday, the won/dollar exchange rate rose by 14.1 points to close at 1,084.5, the biggest rise since June 20, last year (a 14.9-point rise) when global financial markets jolted on the U.S. Federal Reserve`s announcement of a possible exit strategy.

Since the beginning of this year, the won/dollar exchange rate rose by almost 30 points. On January 29, the Fed decided to reduce bond-buying by 10 billion U.S. dollars a month, triggering a massive outflow of capital from emerging markets and leading to a strengthening U.S. dollar.

Stock markets were also hit hard. The main stock index KOSPI closed at 1,919.96 on Monday, down 21.19 points from last Wednesday. Plunging currency values in emerging economies and China`s economic slowdown also affected the Korean stock market. The purchasing managers` index in both China`s manufacturing and non-manufacturing sectors declined in January, spurring concerns that the world`s growth engine is cooling off. Some analysts said the KOSPI could fall below 1,900 in the short term. In Japan, the Nikkei average stock index closed at 14,619.13 yen, down 295.40 yen (1.98 percent) from Friday.

Korea`s financial authorities have launched actions against rising uncertainty in global financial markets. At an executive meeting, Financial Supervisory Service Chairman Choi Soo-hyun urged, "Guide financial institutions to take self stress tests based on all possibilities such as worsening foreign borrowing conditions and expanding market volatility." The financial industry watchdog also called a meeting with capital managers at seven commercial banks and made an urgent examination of foreign currency liquidity at financial institutions.