Won-Dollar Exchange Rate Countdown to 1300 Won... "Breakthrough in May"

Dollar Index Hits Highest in 19 Years 5 Months
If US Fed Continues Big Step Moves
High Chance of Breaking 1300 Won Level

Authorities' Intervention Intensity and Speed Are Variables
Market Focuses on Stabilization Measures

On the 13th, KOSPI opened at 2,570.01, up 19.93 points (0.78%) from the previous trading day, as dealers were working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. On the same day, the won-dollar exchange rate started trading at 1,290.8 won, up 2.2 won from the previous trading day. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Seo So-jeong] As the won-dollar exchange rate approaches the 1300-won level, a sense of crisis is intensifying in the South Korean economy. The strong dollar phenomenon continues due to the U.S. Federal Reserve's (Fed) aggressive tightening and the prolonged Ukraine crisis, causing the won's value to plummet sharply and casting a shadow over South Korea's highly external-dependent economy. Experts suggest that if this trend continues, there is a possibility of breaking through 1300 won as early as May, drawing attention to the intensity of intervention by foreign exchange authorities.

According to the Seoul foreign exchange market on the 13th, the won-dollar exchange rate opened at 1290.8 won, up 2.2 won from the previous day, rose to 1291 won shortly after opening, and has since fluctuated around the 1290 won level. The dollar index, which shows the value of the dollar against six major currencies, also moved around 104.75, marking the highest level in 19 years and 5 months since December 12, 2002. The exchange rate, which closed at 1288.6 won the previous day, recorded the highest level in about 13 years since July 14, 2009 (1293.0 won) amid the aftermath of the global financial crisis. However, it appears to be gradually calming down as concerns about intervention by foreign exchange authorities arise.

However, experts foresee a high possibility of breaking through 1300 won in the short term, as the Fed has announced it will continue its 'big step' approach of raising interest rates by 0.5 percentage points at a time. The last time the won-dollar exchange rate closed above 1300 won was on July 13, 2009 (1315 won), and there is speculation it could happen again after 13 years.

Oh Chang-seop, a researcher at Hyundai Motor Securities, said, "The won-dollar exchange rate reached 1300 won during emergency situations such as the global financial crisis, but looking at the recent exchange rate trend, it is highly likely to break through in the first half of the year. However, since the government is expected to launch an all-out effort to block the 1300 won level, this is a factor that weakens additional betting." He explained that the U.S. Producer Price Index (PPI) for April, announced overnight, rose 11% compared to a year ago, remaining at a high level, which is increasing risk aversion and sustaining the strong dollar.

On the 13th, the KOSPI opened at 2,570.01, up 19.93 points (0.78%) from the previous trading day, as dealers were working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. On the same day, the won-dollar exchange rate started trading at 1,290.8 won, up 2.2 won from the previous trading day. Photo by Kang Jin-hyung aymsdream@

In particular, recent sharp rises in the exchange rate are analyzed to be deepening due to concerns over economic slowdown in addition to U.S. inflation. Moon Hong-chul, a researcher at DB Financial Investment, pointed out, "Inflation and interest rate hikes are factors for a strong dollar, and economic recession also causes a strong dollar. Until last week, the strong dollar was due to concerns over U.S. tightening, but from this week, recession factors seem to have a significant impact on the strong dollar. From the perspective of foreign investors, the preference for investing in emerging markets weakens, leading to capital outflows, which ultimately results in exchange rate increases." He predicted, "The 1300 won level could be broken as early as May."

In fact, foreign investor capital outflows have begun in earnest in the South Korean stock market. According to the Bank of Korea's 'International Finance and Foreign Exchange Market Trends,' foreign investors recorded a net outflow of $4.26 billion in stock investment in April. Based on the won-dollar exchange rate at the end of April (1255.9 won), about 5.35 trillion won was withdrawn, marking the third consecutive month of net outflows. The scale of net outflows also intensified, increasing from $1.86 billion in February to $3.93 billion in March.

Experts warn that the sharp decline in the won's value could shock the South Korean economy, which is highly dependent on exports. While past declines in the won's value were positive for exporters, a sustained decline signals economic sluggishness in South Korea. The accumulation of trade deficits due to soaring energy prices also lowers the won's value, acting as a factor of external instability. The trade deficit from the beginning of this year to the 10th of this month stands at $9.86 billion (approximately 12.72 trillion won). Kim Jung-sik, an emeritus professor at Yonsei University, emphasized, "Rising import prices due to soaring raw material prices increase the burden on companies. If the trade deficit continues and the won-dollar exchange rate breaks through 1300 won, there is a possibility of exposure to a foreign exchange crisis, so stabilizing the foreign exchange market is an urgent task."

The market's attention is focused on the foreign exchange authorities' measures. Although it will not be easy to stop the rising exchange rate trend amid the global strong dollar phenomenon, the intensity and speed of intervention by authorities could act as variables. Jeon Kyu-yeon, a researcher at Hana Financial Investment, said, "Breaking through 1300 won occurred during emergencies such as the global financial crisis, COVID-19, and the Southern European crisis. The current exchange rate level is very burdensome." He added, "Since there are many global factors for a strong dollar, the possibility of breaking through 1300 won in the short term is high, and the situation requires reliance on government intervention."