With fears about the eurozone debt crisis and a slower recovery of the U.S. economy weighing down investor sentiment, a recovery of the KOSPI hinges on the stabilization of the local currency, analysts said on Wednesday. 

The Korean stock market in the past week went through gyrations on growing concerns about the global economy, sending the Korean won plummeting. Though both regained some ground, analysts warned that a stronger dollar could derail recovery.

“The stock market’s recovery will follow only after investors are convinced the dollar’s runaway rise would stop,” said Suh Dong-pil, analyst at Hana Daetoo Securities. “As the risks stemming from the eurozone crisis are still reflected in the currency market, the fluctuation of the Korean won is crucial for the stock prices.”

The underlying issue is that European banks, especially those faced with a possible fallout from the default of Greece and other debt-saddled countries, might begin to pull out their funds more aggressively from emerging markets including Korea, if the European policymakers failed to come up with a viable option to contain the crisis.

Already, a sizable amount of funds from Europe have been withdrawn from the Korean markets, despite the continued assurances from the local authorities that such outflow might not amount to a major problem.

A credit crunch that might follow a disruptive turn in the eurozone’s crisis is likely to make the U.S. dollar ever more attractive as a relatively safe destination. Other currencies, such as the Korean won, could face greater downward pressure if such a scenario plays out.

Hyundai Securities analyst Bae Sung-young agreed: “The stronger dollar and the eurozone problems are driving more foreign investors to unload their holdings in Korean shares in recent weeks.”

“The volatility of the currency and stock markets in Korea has gone up sharply with even local investors joining the sell-off on the assumption that a rapid slide in the Korean won would be coupled with a drop in stock prices.”

Of course, other factors like massive buy orders from foreign investors could bolster the stock prices, but more investors are paying attention to the movement of the Korean won against the U.S. dollar, said Lee Jung-ho, analyst at Tong Yang Securities.

In September, the Korean currency fell more than 12 percent to the U.S. dollar compared with two months ago on global recovery woes, making it the worst performer among 21 major currencies.

On Sept. 26, the Korean unit closed at 1,195.80 won, down 12.1 percent compared with July 26. On Wednesday, the U.S. dollar ended at 1,171.2 won, down from 1,173.1 won.

Experts attributed the won’s sharp fall to Korea’s high degree of market openness and freer systems in which foreign capital can quickly move in and out of the country.

By Yang Sung-jin (insight@heraldcorp.com)