[Why&Next] How Long Will the Won's Weakness Continue?

Recent Won Weakness Attributed to External Factors
Won-Dollar Exchange Rate Expected to Stay in 1300 Range Until Year-End
Forecasts Suggest Upper Limit May Reach 1500 Range Next Year

Until last year, the won-dollar exchange rate remained in the 1,200 won range, but this year it has surpassed 1,300 won, leading to an assessment that the 1,300 won range has become the so-called 'new normal.' Experts believe it will be difficult to expect the exchange rate to return to the 1,200 won range at least until the end of this year. This is because the average exchange rate level has risen, and the scale of overseas investment by domestic investors is also increasing, maintaining pressure on the won's weakness.

[Image source=Yonhap News]

According to the Bank of Korea's Economic Statistics System (ECOS) on the 13th, the last time the won-dollar exchange rate (closing price at 3:30 PM) stayed in the 1,200 won range was December 28 last year (1,288 won).

This year, the exchange rate started in the 1,300 won range on January 2 (1,300.40 won), but on April 16, due to geopolitical tensions in the Middle East and a strong dollar, it touched 1,400 won intraday. Since then, the foreign exchange market has somewhat calmed down following verbal interventions, and it is currently fluctuating in the mid-to-high 1,300 won range.

Won Weakness Attributed More to External Environment than Fundamentals

Experts view the recent continued weakness of the won as being caused more by external factors than by fundamentals. One of the indicators showing the basic strength (fundamentals) of the Korean economy, the current account balance, recorded a surplus of $12.26 billion in June, marking the third-largest surplus ever. The current account surplus for the first half of the year was $37.7 billion, showing a better performance compared to the first half of last year ($1.15 billion).

[Image source=Reuters Yonhap News]

Despite a solid current account surplus, the won's weakness is analyzed to be due to relatively low growth and low interest rates compared to major countries like the U.S. During the period of won strength from 2005 to 2007 (won-dollar exchange rate around 900 to 1,000 won), Korea's growth rate was relatively better than the U.S., leading to a decline in the exchange rate. From 2013 to 2015 (won-dollar exchange rate around 1,000 to 1,100 won), the growth rate difference was not significant, but Korea's benchmark interest rate was relatively higher, resulting in a stable exchange rate trend. Similarly, at the end of 2008, when the yen-dollar exchange rate was below 100 yen, Japan's growth rate was higher than the U.S., and the interest rate difference was minimal (U.S. 0.1%, Japan 0.125% as of December 2008).

Choi Kyu-ho, a researcher at Hanwha Investment & Securities, said, "Since the 2000s, this is the first time Korea has experienced more than six months of both lower growth and lower benchmark interest rates compared to the U.S.," adding, "In a situation of low growth and low interest rates relative to the U.S., even if Korea's fundamentals recover absolutely, it is difficult for the won to strengthen." He further explained, "Although the current account surplus earns dollars, a significant portion will flow back to the U.S., where growth is strong and interest rates are high."

There are also points that the increasing scale of overseas investment is influencing the won's weakness. According to the Bank of Korea and the Korea Capital Market Institute, the scale of overseas securities investment by Korean residents was $857.3 billion (about 1,175 trillion won) as of the end of last year, nearly nine times larger than the approximately $100 billion at the beginning of 2010. From 2015 to 2023, the overseas securities investment balance showed an average annual growth rate of 18.1%.

Researcher Choi explained, "In the past, the demand and supply of dollars related to real transactions such as exports and imports accounted for most of the foreign exchange market flow," adding, "Recently, as the proportion of money transactions for buying and selling assets has increased, it has become difficult to explain the exchange rate solely by the current account."

Experts assess that the current exchange rate level has risen to the 1,300 won range. Researcher Choi said, "During the process of entering advanced country status, economic growth rates inevitably decline, and the scale of overseas investment inevitably increases," adding, "Although the average exchange rate level itself has risen, if the increase in the exchange rate is not large, it will not be a big problem."

Ha Geon-hyung, a researcher at Shinhan Investment Corp., also said, "Even if the exchange rate level rises to the 1,300 won range, it is not a big problem if the speed is gradual," explaining, "If volatility is large, such as the recent yen-dollar exchange rate plummeting from 160 yen to 140 yen, financial system instability increases, which is problematic. However, if economic agents have enough time to adapt to the newly formed exchange rate, it is acceptable."

Won-Dollar Exchange Rate Expected to Stay in 1,300 Won Range Until Year-End

The exchange rate is expected to remain in the low to mid 1,300 won range until the end of the year and may rise to the 1,400 to 1,500 won range after mid-next year. Researcher Ha said, "Due to the restructuring of supply chains centered on advanced countries, capital is flowing overseas, structurally favoring the U.S.," adding, "In the short term, the won-dollar exchange rate may fall, but after mid-next year, as demand for goods peaks and declines, it could reach the 1,400 to 1,500 won range."

There is also an assessment that a rise to the 1,400 won range would be excessive. Researcher Choi said, "I expect the won-dollar exchange rate to stay in the 1,200 to 1,300 won range for the next few years, with a downside around 1,250 won until the first quarter of next year," adding, "For the exchange rate to exceed 1,400 won, there would need to be a significant strengthening of the dollar or major weakening of the yen or yuan, among other issues." He explained, "Currently, the possibility of additional interest rate hikes in Japan has decreased, and China is expected to have a consumption-driven economy in the second half, so the likelihood of the won surging further is low in many respects."