Exchange Rate Hits 17-Month High...Why Is the Authorities Not Intervening? [Why&next]

Around 1,360 Won, Highest Since November 2022
"Low Possibility of Exceeding 1,400 Won"
Further Increase May Trigger Foreign Exchange Authorities' Intervention

On the afternoon of the 11th, the status board in the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, displayed the KOSPI, won/dollar exchange rate, and KOSDAQ index. The won/dollar exchange rate surged on the 11th due to the shock from the US Consumer Price Index (CPI), reaching its highest level in 17 months. [Image source=Yonhap News]

The won-dollar exchange rate has reached its highest level in 17 months. This is because persistent high inflation in the United States has pushed back expectations for the Federal Reserve's (Fed) interest rate cuts, strengthening the dollar.

According to the Seoul foreign exchange market, on the 11th, the won-dollar exchange rate closed at 1,364.1 won, up 9.2 won from the previous trading day. This is the highest closing price since November 10, 2022 (1,377.5 won). On the 12th, it opened at 1,367.7 won, 3.6 won higher than the previous day.

The won-dollar exchange rate fluctuated around the 1,330 won level earlier this year, then fell to the 1,310 won range in early March, before rising to the 1,360 won range over the following month. Despite the rapid increase in the exchange rate over a short period, the foreign exchange authorities did not intervene in the market.

Reasons Why Authorities Are Not Intervening Despite the Sharp Rise in Exchange Rates

The reason why our foreign exchange authorities are not actively defending the exchange rate yet is that the current dollar strength is a global phenomenon, not limited to Korea, and it is judged that it does not have a particularly negative impact on our economy.

Currently, only the dollar is strong, while other currencies such as the yen, yuan, and euro are also weakening. In particular, the yen-dollar exchange rate has surged past 153 yen, reaching its highest level in about 34 years since June 1990, but the won exchange rate per 100 yen remains stable around 890 won. The dollar's unique sustained strength is the main cause of the recent rise in the won-dollar exchange rate. The dollar continues to strengthen due to the robust U.S. economy, the possibility of persistent U.S. inflation, and the delayed timing of interest rate cuts. The dollar index, which measures the dollar's relative value against six major currencies, rose to 105.189 the previous day, the highest in five months since last November. A foreign exchange authority official said, "We believe the won is relatively well defended against the dollar compared to other countries."

Additionally, Korea is receiving positive evaluations in terms of foreign exchange soundness due to ample foreign exchange reserves and strong exports. A foreign exchange authority official said, "We are closely monitoring the foreign exchange market as the won-dollar exchange rate continues to rise," but added, "We do not see the current exchange rate situation as having a significant negative impact on the economic activities of our companies or financial institutions." If the exchange rate suddenly spikes due to unexpected factors, intervention would be necessary, but a gradual increase over about a month is not considered a major problem.

There is also an argument that the average level of the won-dollar exchange rate being higher than in the past is normal. KB Securities researcher Hainhwan explained, "In the past, the won-dollar exchange rate surpassed 1,300 won during crisis situations like the financial crisis. However, now, rather than concerns about a recession like before, the higher average level of the won-dollar exchange rate reflects the phenomenon of deglobalization, making it normal."

How High Will the Won-Dollar Exchange Rate Go?

However, concerns are growing about the negative impact on the domestic economy as the won-dollar exchange rate continues to rise. If the exchange rate rises excessively in a short period, it can restrict companies' export and import activities and negatively affect financial transactions of financial institutions. It can also raise import prices and stimulate consumer prices. Park Sang-hyun, a researcher at Hi Investment & Securities, evaluated, "The rise in the exchange rate increases the potential risk of negatively affecting the domestic economy and inflationary pressures."

In fact, in 2022, when the U.S. rapidly raised interest rates and the dollar sharply strengthened, pushing the won-dollar exchange rate to the 1,400 won range, the foreign exchange authorities actively intervened in the market to stabilize the exchange rate. Although the government generally refrains from comments or market intervention related to the exchange rate, it considered the negative impact of sharp exchange rate volatility on the economy.

Experts believe that if the won-dollar exchange rate rises significantly beyond the current level, the foreign exchange authorities are likely to intervene to calm the market. Min Kyung-won, a researcher at Woori Bank, stated, "As the dollar strengthens, market awareness of the possibility of verbal intervention by foreign exchange authorities is also increasing."

However, the market sentiment is that the won-dollar exchange rate is unlikely to exceed the 1,400 won level. Kim Ho-jung, a researcher at Yuanta Securities, explained, "It is expected to steadily rise until the end of May, reaching about 1,390 won, then fall back to around 1,360 won. Due to factors such as Korean exporters' payment of funds and foreign dividend exchange occurring at the beginning of the year, it is unlikely to fall below 1,300 won and is expected to remain in the 1,360 won range until May." Choi Ye-chan, a researcher at Sangsangin Securities, said, "If there is no signal of U.S. interest rate cuts, it could reach the 1,400 won range, but if a cut is expected within the year, it will not reach 1,400 won. The possibility up to the 1,370 won range remains open, but U.S. inflation indicators should be closely monitored."