Is it time to reevaluate the stable standard of S. Korean won? Some experts say yes

Posted on : 2022-05-03 17:45 KST Modified on : 2022-05-03 17:45 KST
Underlying the calls for reconsidering the standard for the won is the conclusion that it is actually less undervalued than other major currencies
A monitor at KEB Hana Bank in central Seoul displays the won-to-dollar exchange rate on May 2. (Yonhap News)
A monitor at KEB Hana Bank in central Seoul displays the won-to-dollar exchange rate on May 2. (Yonhap News)

The South Korean won finished trading at 1,265.1 to the US dollar on the Seoul foreign exchange market Monday, a rise of 9.20 from the closing price on the previous trading day.

With the exchange rate approaching 1,300 won to the dollar, some market observers are increasingly raising the need to reevaluate the “stable” standard for the currency’s value in consideration of South Korea’s economic fundamentals in the wake of the COVID-19 pandemic.

The won-to-dollar exchange rate has not crossed the 1,300 threshold since the global financial crisis of 2008. Recently, the rate has been at its highest level since March 19, 2020, when it reached a closing price of 1,285.7 amid the financial and foreign exchange market turmoil sparked by the pandemic.

Underlying the calls for reconsidering the standard for the won is the conclusion that it is actually less undervalued than other major currencies.

As of Thursday, when the rate reached a high of 1,272.5 won to the dollar, the US dollar index — which represents the value of the dollar compared with six major currencies — was up by 8.1% from late 2021.

Over the same period, the value of the won as a counter currency fell by 6.6%. In contrast, the Japanese yen’s value relative to the dollar dropped by 11.6%, while the euro’s value declined by 7.6%.

“Many people see the recent rise in the won-to-dollar exchange rate as being less a matter of South Korea’s fundamentals than an extension of the global strength of the dollar amid external variables such as the US’ interest rate hikes and China’s COVID-19 lockdown measures,” explained a South Korean government official.

“We’re not seeing people who approach [the recent trends] as signaling some sort of problem with the South Korean economy,” they added.

While exchange rates are seen as a representative indicator signaling economic crisis when values drop very sharply, these observers are suggesting that the recent trend does not point to any problems with national fundamentals, since the won is less undervalued than other currencies.

But other analysts counter that the won has actually depreciated considerably, with an average rise of around 100 won to the dollar if the time frame is expanded to include last year.

“You can’t really conclude from analyses that this is a ‘suitable’ or ‘balanced’ currency value for a country,” said a senior foreign exchange official.

“Nobody can simply declare that a range above 1,300 won [to the dollar] is a new normal equilibrium point for the won,” they added.

“But if we consider how long the won’s rise has persisted since rising by around 100 [to the dollar] last year, there are cautious predictions that the won-to-dollar exchange rate could end up hovering within a certain range that tops out in the low 1,300s,” they suggested.

In addition to the US interest rate hikes and other external macroeconomic shocks, analysts are also pointing to the recent trend of South Korean exporting businesses selling off their dollars as another factor that could affect the stable standard for the exchange rate.

The trend has been for exporting companies to sell their dollar holdings from exports on the foreign exchange market at the end of the month. Recently, the intermediate-term stable won-to-dollar levels decided independently by companies have been higher than before with the steep rise in the exchange rate.

“South Korea’s currency is feeling the effects right now from the US moving too quickly to raise its interest rates after suffering an inflation crisis due to general missteps with its monetary policies in response to COVID-19,” a senior foreign exchange official explained.

“I don’t yet get the sense that the actual [normal] level of the won’s exchange rate has been fundamentally changing,” they added.

By Cho Kye-wan, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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