hankyoreh

Monitors at Hana Bank’s dealing room in downtown Seoul display the KOSPI and exchange rate figures on the afternoon of Sept. 16. (Yonhap)

South Korea’s foreign exchange authorities are scrambling as the won-dollar exchange rate seems poised to breach 1,400 won, which would be its highest point in over 13 years. The relevant powers are tightening controls and waging a tug-of-war with the market as they move ahead with more interventions.

But it’s widely expected that the weak won — driven by “king dollar” — will continue for structural reasons including the domestic trade deficit and the US’ base interest rate overtaking Korea’s. Despite the watchful eye and interventions of authorities, the countdown to a 1,400 won exchange rate resumed at the beginning of this week.

On Sunday, the Korean Ministry of Economy and Finance convened a policy review meeting that was attended by the ministry’s most senior officials, including the assistant deputy minister for international economic management, the person in charge of foreign exchange issues. The weekend meeting was held to review the price of goods and exchange rate trends.

The Ministry of Economy and Finance, along with other foreign exchange authorities, has reportedly been taking proactive steps to defend the won-dollar exchange rate, such as by putting large numbers of dollar reserves on the market on Thursday and Friday.

Those steps were signaled by Choo Kyung-ho, deputy prime minister and minister of economy and finance, in an appearance before the National Assembly’s Strategy and Finance Committee on Thursday morning. “We’re keeping a close eye on the rapidly rising exchange rate. While there’s no need to get too anxious about this, we can’t just sit on our hands,” Choo said at the time.

The won-dollar exchange rate went as high as 1,397.9 won during trading on Thursday before closing the day at 1,393.7. That was the rate’s highest point during trading since March 31, 2009 (1,422.0).

That afternoon, the foreign exchange authorities managed to boost the won with a verbal intervention, noting that they’re “closely and vigilantly monitoring the possibility of herd behavior in the market.”

On Friday, the won-dollar exchange rate opened the day at 1,399.0, but ended the day at 1,388.0, presumably after authorities took steps to manage the closing price.

“I don’t think they have a particular level in mind [that is, a rate of 1,400 won], but they appear to have intervened aggressively to quash the impression that the authorities have their hands off the tiller,” a source in the foreign exchange market said in a phone call with the Hankyoreh.

Sources say that the foreign exchange authorities have recently asked commercial banks dealing in dollars for real-time briefings on dollar ordering trends and on their own foreign exchange buy and sell positions. While the authorities were already being briefed on the supply of foreign currency, the authorities’ request amounted to a warning that they won’t ignore unnecessary dollar buying for purposes such as foreign exchange speculation.

The problem, however, is that the domestic situation in Korea and overseas isn’t amenable to stabilizing the exchange rate. Consumer prices in the US in August were up 8.3% from the previous year, exceeding market expectations. The predominant prediction, therefore, is that the US Federal Reserve will take another “giant step” (raising the benchmark interest rate by 0.75 points) for the third time in a row in its monetary policy meeting on Wednesday and Thursday this week.

If the US benchmark interest rate (currently 2.25%-2.50%) overtakes Korea’s (2.50%), it could provoke more capital outflow and make the won even weaker.

Another factor weighing down the exchange rate is the growing likelihood that Korea will report a trade deficit (when imports exceed exports) in September, which would be the sixth month in a row, since April. The exchange rate can face upward pressure when more dollars are outbound than inbound through foreign trade.

Market analysts currently take it for granted that the won-dollar exchange rate will rise above 1,400 won because there’s nothing on the horizon that’s likely to restore a strong won.

“There hasn’t been any meaningful resistance for the won-dollar exchange rate since it breached 1,250 won, which had served as the upper resistance line over the past decade. Given the lack of a clear resistance line for the exchange rate, scant evidence for predicting its peak, and unstable conditions overseas, we can’t rule out the possibility of the rate rising close to 1,450 won,” predicted Kim Hyo-jin, an analyst with KB Securities.

By Park Jong-o, staff reporter

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