Concerns Over Exchange Rate Settling at 1300 Won "Overshooting Phase, Different from Financial Crisis"

[Asia Economy Reporter Lee Seon-ae] Although the won-dollar exchange rate has surpassed pandemic levels and approached the level seen during the global financial crisis, analysts say the current situation is different from that crisis.

On the 13th, the exchange rate closed at 1,284.2 won per dollar, down 4.4 won from the previous day's closing price. The rate opened at 1,290.8 won, up 2.2 won, and at one point rose to 1,291.0 won. This marks a sharp rise to the 1,291 won level for two consecutive days. On the 12th, the exchange rate reached 1,288.6 won, the highest since July 16, 2009 (1,293.0 won), during the global financial crisis.

Experts have predicted a breakthrough of 1,300 won since the moment the exchange rate surpassed the 1,250 won level. However, 1,300 won is a level not seen since the global financial crisis, raising concerns. Nevertheless, experts analyze that the current situation differs from that crisis.

Park Sang-hyun, a researcher at Hi Investment & Securities, said, "Factors such as the U.S. Federal Reserve's (Fed) interest rate hikes, energy price instability, and disappointment over U.S. April consumer prices are contributing to the won's weakness. Considering South Korea's economic fundamentals, the 1,300 won exchange rate is an excessive rise phase, and there are doubts about whether it currently reflects the domestic economic fundamentals."

He explained that during the early COVID-19 period (March 2020) and the global financial crisis (July 2009), the domestic economic growth rate was negative, but now growth in the high 2% range is expected, indicating a clear difference. Moreover, the domestic CDS level remains lower than it was in March 2020.

Researcher Park emphasized, "If external uncertainties are partially resolved, the exchange rate will stabilize downward to the 1,200 won range rather than settling at 1,300 won," adding, "We should be cautious about the spread of fear that 1,300 won marks the entry into another crisis phase." He also noted, "However, alongside the Fed's interest rate hike cycle, there is a risk of financial market instability spreading due to a hard landing of China's economy, which should be monitored."

Given this trend, many experts raise the possibility of the exchange rate breaking through 1,300 won as early as May and call for stronger intervention by foreign exchange authorities.

Oh Chang-seop, a researcher at Hyundai Motor Securities, said, "The won-dollar exchange rate hitting 1,300 won was during emergency situations like the global financial crisis, but looking at recent trends, it is highly likely to break through in the first half of the year. However, the government is expected to launch an all-out effort to block 1,300 won, which will likely weaken additional betting."

Moon Hong-cheol, a researcher at DB Financial Investment, also said, "Inflation and interest rate hikes are factors for a strong dollar, and economic recession also causes a strong dollar. From the perspective of foreigners, investment preference for emerging markets weakens, leading to capital outflows, which ultimately results in exchange rate increases," forecasting a breakthrough of 1,300 won in May.

Foreign exchange authorities are also expected to focus on defending the 1,300 won level. Economic Deputy Prime Minister and Minister of Strategy and Finance Choo Kyung-ho stated at the macro-financial situation review meeting chaired by President Yoon Seok-yeol, "To stabilize the market, we will closely cooperate with the Bank of Korea and operate a 24-hour monitoring system for domestic and international conditions and market situations. Especially given the recent high uncertainty in the foreign exchange market, we will thoroughly review contingency plans and establish an effective response system to prepare for any eventualities."