Korean currency could depreciate to 1,500 against US dollar by year’s end

Posted on : 2022-09-23 17:11 KST Modified on : 2022-09-23 17:11 KST
The exchange rate surpassed 1,400 won to the greenback on Thursday for the third time since the floating exchange rate was introduced
Monitors at Hana Bank’s dealing room in downtown Seoul display the KOSPI and exchange rate figures on Sept. 22. (Yonhap)
Monitors at Hana Bank’s dealing room in downtown Seoul display the KOSPI and exchange rate figures on Sept. 22. (Yonhap)

The Korean won has breached the psychological resistance line of 1,400 won to the US dollar, prompting speculation that the rate could hit 1,500 won by the end of the year.

The won-dollar exchange rate closed at 1,409.7 won on Thursday in the Seoul foreign exchange market, up 15.50 won from the previous day of trading.

The exchange rate has only topped 1,400 won on two previous occasions since a floating exchange rate was introduced in 1997 — once during the global financial crisis (2008-2009) and once during the Asian financial crisis (1997-1998).

Korea’s foreign exchange authorities have taken aggressive steps to intervene, ordering commercial banks to provide real-time reports on dollar orders, but that has failed to offset powerful market pressure to push the rate above 1,400 won.

Anxiety in the financial markets also pushed Korea’s benchmark KOSPI index down 0.63% (14.90 points) from the previous day of trading to 2,332.31, raising fears that the index won’t be able to defend the 2,300-point line.

The sharp rise of the won-dollar exchange rate on Thursday was driven by mounting factors that are contributing to the depreciation of the won.

The US Federal Reserve raised its annual base interest rate from 2.25%-2.5% to 3.0%-3.25% in a “giant step” during an overnight meeting of the Federal Open Market Committee.

Fed members’ median predictions for the annual base rate (based on their dot plots) were 4.4% by the end of this year and 4.6% by the end of next year. In addition, the Fed significantly lowered its forecast for the rate of growth of the US economy this year from 1.7% down to 0.2%.

Given the Fed’s aggressive retrenchment and the possibility of a slowdown in the US economy, the dollar’s value as a safe haven in the market soared, while the value of the won plummeted in comparison. The won’s value is being dragged down even further by domestic factors, including a shift to a deficit in the balance of goods in the trade and current accounts, a potential slowdown in semiconductor exports, and increasing overseas investment by residents of Korea.

Given the lack of any obvious factors that could strengthen the won, there’s even talk about the won-dollar rate reaching 1,500 won by the end of the year.

“The won-dollar exchange rate has reached a peak for the third quarter of the year. But since the rate rose above 1,400 won today, it could rise even higher at the beginning of next year. We’re adjusting the upper end of our exchange rate projections to the 1,500 won level,” said Kim Seung-hyuk, an analyst for NH Futures.

With the won-dollar exchange rate hitting levels that are reminiscent of previous financial crises, tensions are running high.

High exchange rates increase the cost of purchasing imported goods in dollars, which could drive up the cost of consumer goods. That said, Korea is better positioned to acquire dollars than it has been in previous crises.

Experts are watching not only the foreign exchange market, where the nominal exchange rate is decided, but also the foreign currency money market, where dollars are borrowed and lent. A financial crisis occurs when a dollar liquidity crunch makes it tough for banks and companies to get their hands on dollars.

That’s what makes the resilience of the foreign currency money market so important.

In a financial stability update on Thursday, the Bank of Korea said that even if foreign currencies are withdrawn from domestic and foreign banks at a level similar to the financial crisis of 2008, that will only amount to 56.4% of all banks’ foreign currency holdings. That means that the banking community currently holds enough foreign currency to handle a shock.

“We’ll respond aggressively to one-sided herd behavior, including rising speculative sentiment resulting from the recent rise of the exchange rate. We’ll hold fast to our plan to respond swiftly and sternly by mobilizing all available methods at the necessary moment,” said Choo Kyung-ho, Korea’s deputy prime minister and minister of economy and finance, while speaking with reporters following an emergency meeting on macroeconomic and financial affairs on Thursday.

By Jun Seul-gi, staff reporter

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

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