[King Dollar's Bombardment] The Won Falls Especially Hard... 4.72% Drop Since Big Step

Recent Won Depreciation Larger Compared to Other Countries
Financial Crisis-Level Value Drop After Jackson Hole Meeting
Strong Dollar and Weak Yen, Yuan Also Impact
"Dollar Buying, Won Selling Sentiment Overheated"

On the 6th, an employee is organizing dollars at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. [Image source=Yonhap News]

Although most major currencies worldwide are declining due to the U.S. Federal Reserve's (Fed) tightening monetary policy, the value of the Korean won is falling at a notably faster pace. In particular, since Fed Chair Jerome Powell made hawkish (monetary tightening-preferred) remarks at last month's Jackson Hole meeting, the depreciation of the won has been greater than that of Japan, which maintains ultra-low interest rates, as well as Europe and China, where concerns about economic slowdown are significant, and even compared to Australia and Canada.

According to the financial and foreign exchange markets on the 7th, as the dollar's ultra-strong momentum continues and major currencies decline, the won has recently plunged to levels seen during the financial crisis. Looking at the entire year so far, the won has depreciated 13.33% against the dollar as of the previous day, which is less or similar compared to the yen (-18.49%), British pound (-14.31%), Swedish krona (-15.91%), and euro (-12.40%), but the atmosphere has changed since the first half of the year.

Since the Bank of Korea implemented a 'big step' (a 0.50% base rate hike) for the first time in history on July 13, the won has fallen 4.72%, a much larger decline than the euro (-0.92%), yen (-2.72%), pound (-2.51%), krona (-1.92%), and Canadian dollar (-1.13%). After Chair Powell stated at the Jackson Hole speech on the 26th of last month that "this is not the time to stop or pause rate hikes," the won-dollar exchange rate consecutively surpassed 1,350 won, 1,360 won, and 1,370 won, soaring to the highest level since the financial crisis.

The won is experiencing increased volatility not only due to the dollar but also influenced by the weakening of the yuan, yen, and euro. When the yuan and yen depreciate, South Korea's relative export competitiveness declines, leading to a growing trade deficit and negatively impacting the overall economy. In the case of the yuan, Chinese authorities adjust the exchange rate through foreign currency reserve requirements, and despite Japan's ultra-low interest rate policy, the yen still holds a high status, which may limit its depreciation compared to the won.

Until early this year, the Bank of Korea explained that the won's depreciation was not as significant compared to other countries, but recently it has somewhat acknowledged the downward trend. Bank of Korea Governor Lee Chang-yong responded to a question about the 'particularly large depreciation of the won' during a press conference following the emergency macroeconomic and financial meeting on the 5th, saying, "The answer depends on the period you look at." This can be interpreted to mean that although the won's depreciation has been large recently, it is not so when considering the entire year.

Kim Seung-hyuk, a researcher at NH Futures, explained, "The won has recently shown more weakness than South Korea's economic fundamentals would suggest, which is due to overheated sentiment buying dollars and selling won," adding, "In a situation where risk aversion is strong, Asian currencies are weakening, and the won is the most likely target."