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A person walks past a monitor showing the won-dollar exchange rate on June 23, 2022, at KEB Hana Bank’s headquarters in downtown Seoul. (Yonhap News)

The won-dollar exchange rate has risen above 1,300 won for the first time in 13 years. That appears to reflect concerns about the South Korean economy, which is highly dependent on foreign trade, as the US Federal Reserve acknowledges the possibility of an economic recession.

The won-dollar exchange rate finished trading on the Seoul forex market at 1,301.8 won to the dollar on Thursday, up 4.5 won from the previous day. The rate reached 1,300 won just six trading days after reaching 1,290 won on June 15. That’s the highest the rate has been since July 13, 2009 (1,315.0 won), during the global financial crisis.

The collapsing value of the won reflects the gradually worsening prospects of the global economy. Given the Korean economy’s total dependence on foreign trade, growing concerns that exports may slow are driving the stock market down and leading to a selloff of the won, analysts say.

That’s why some project the exchange rate will remain high for some time. There are also concerns that inflation will grow even more severe as Korean companies reflect the higher cost of importing raw materials (driven by the high exchange rate) in consumer prices.

Statistics provided by the Bank of Korea on Thursday show that the won-dollar exchange rate has risen 64.6 won (5.2%) since the end of last month — a considerable jump considering the US dollar index only rose around 2.4% over the same period. That’s leading analysts to think the rate is affected not only by the strong dollar, which is being driven by the US’ contractionary policy, but also by domestic economic factors.

One apparent factor is the flight of foreign investors from the Korean stock market. Foreign investors have driven a selloff for the past five consecutive trading days. That has basically set off a vicious cycle in which fears about falling stock prices push foreign investors to sell Korean stock, which then further diminishes the value of the won.

The benchmark KOSPI has lost 13.8% since the end of the previous month, while the Dow Jones Industrial Average and the S&P 500 only fell 7.6% and 9.0%, respectively. The decline was even milder on Japan’s Nikkei 225 (-4.0%) and China’s Shanghai Composite Index (-4.2%).

“Most foreign stock investors are trading without forex hedging. The dollar is strengthening as they change their proceeds from stock market sales back into dollars in the Seoul foreign exchange market,” explained a Korean official who handles matters related to foreign exchange.

That also means that foreigners are converting the earnings from those sales into dollars and departing the Korean market instead of leaving them in won and waiting for an opportunity to buy more stock.

There are also concerns about a slowdown in exports. The Korea Customs Service reported that Korea had a trade deficit of US$15.5 billion as of Monday. Korea’s exports from June 1 to June 20 were worth US$31.3 billion, down 3.4% from the same period last year.

Exports have fallen while the value of imports has surged by 21.1% as the prices of raw materials soar.

If exports’ recent sluggishness leads to a tangible decline in Korean companies’ performance, it could accelerate foreigners’ stock selloff, causing the value of the won to fall even further.

Projections for the global economy are likely to worsen for the time being. Since the price of goods shows no signs of falling, tougher contractionary measures appear unavoidable.

US Fed Chair Jerome Powell told lawmakers on the Senate Banking Committee on Wednesday that a recession was “certainly a possibility.”

“Frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a strong labor market,” Powell added.

There are also fears that if the exchange rate stays high, consumer prices will begin rising even faster.

“The exchange rate’s spillover into prices is growing as the Fed’s rapid normalization of monetary policy makes the dollar much stronger,” said Lee Seung-heon, senior deputy governor of the Bank of Korea, during a seminar Thursday at this year’s Global Financial Vision Forum.

Lee’s remarks appear to mean that while companies can swallow higher costs without passing them on to consumers when a high exchange rate is temporary, the rising price of imports resulting from the high exchange rate will have a more pronounced impact in the future.

By Lee Jae-yeon, staff reporter; Park Jong-o, staff reporter; Cho Kye-wan, senior staff writer

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