Despite the Threat of 1480 Won Exchange Rate... Why the Foreign Exchange Authorities Are Taking a 'Cautious Wait-and-See' Approach [Why&Next]

Focus on Medium- to Long-Term Foreign Exchange Supply and Demand Improvement Policies Rather Than Direct Intervention Injecting Dollar Funds

On the 27th, the domestic stock market started with a slight decline, and the won-dollar exchange rate surpassed 1,475 won intraday for the first time since the 2009 financial crisis. Employees are working in the dealing room at the Hana Bank headquarters in Euljiro, Seoul. Photo by Heo Young-han

The foreign exchange authorities have entered a high exchange rate 'endurance mode.' Although the won-dollar exchange rate surpassed the 1,460 won mark just a day ago and has now broken through the 1,480 won level, approaching the 1,500 won mark, the authorities are closely monitoring the situation rather than immediately implementing strong measures. Since the likelihood of a sudden economic crisis is low, the foreign exchange authorities plan to focus on medium- to long-term improvement policies for the foreign exchange market rather than short-term exchange rate stabilization measures.

On the 27th, in the Seoul foreign exchange market, the won-dollar exchange rate was trading at 1,481.3 won as of 11 a.m., up 16.5 won from the previous day's closing price at 3:30 p.m. (1,464.8 won). This is the highest level since March 13, 2009 (1,483.5 won) during the global financial crisis.

Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, held an emergency macroeconomic and financial issues meeting at the Korea Eximbank with Lee Chang-yong, Governor of the Bank of Korea, Kim Byung-hwan, Chairman of the Financial Services Commission, and Lee Se-hoon, Senior Deputy Governor of the Financial Supervisory Service, to discuss trends in the financial and foreign exchange markets and response measures. The participants agreed that financial and foreign exchange uncertainties have significantly increased due to the Prime Minister's impeachment motion and decided to monitor and respond to market conditions 24 hours a day.

However, they did not disclose specific measures to lower the current exchange rate level. Instead, they only stated, "If the one-sided market concentration becomes excessive, decisive market stabilization measures will be taken."

The reason the foreign exchange authorities are cautious despite the high exchange rate is that if measures are taken too early, the tools available to use when the exchange rate rises further will be exhausted. Currently, only the US dollar is showing ultra-strong performance, while major currencies such as the euro, yen, and yuan are also weakening. However, the won is weakening more than other currencies due to political instability. South Korea is facing political instability with the impeachment of President Yoon Seok-yeol and the potential impeachment of Acting President Han Duck-soo. If this political instability is not resolved, the won-dollar exchange rate is bound to continue rising.

In this situation, even if the foreign exchange authorities intervene, there is a high possibility that only funds will be depleted without achieving exchange rate stabilization. A foreign exchange authority official said, "The largest measure in terms of dollar supply was the recent increase in the foreign exchange swap limit with the National Pension Service from $50 billion to $65 billion," adding, "I think this is probably the maximum extent we can do."

In fact, most of the exchange rate policies announced so far are medium- to long-term measures. On the 20th, the Ministry of Economy and Finance and the Bank of Korea announced measures such as expanding the foreign exchange swap limit with the National Pension Service and raising the forward exchange position limits for banks. These are mostly 'foreign exchange policies' that indirectly stabilize the market rather than direct 'intervention' to lower the exchange rate. A Ministry of Economy and Finance official explained, "It will take time for the exchange rate to come down immediately, but we are focusing on changing the system and market paradigm."

South Korea's improved fundamentals have also influenced the foreign exchange authorities' calm response. As of the end of last month, South Korea's foreign exchange reserves stood at $415.39 billion, ranking ninth in the world. At the end of December 2008, during the global financial crisis, foreign exchange reserves were $201.22 billion. Since the country now has much stronger foreign exchange defense capabilities than then, the foreign exchange authorities believe that aggressive emergency measures are unnecessary.

The foreign exchange authorities also see no problem if foreign exchange reserves fall below $400 billion. A foreign exchange authority official emphasized, "A drop below $400 billion in foreign exchange reserves does not mean a serious economic crisis is coming," adding, "It is just a psychological number we created ourselves, and the market does not pay much attention to the decrease in South Korea's foreign exchange reserves."

With only two trading days left until the foreign exchange market closes this year, there is no momentum for the exchange rate to fall. The US Federal Reserve has signaled a slowdown by reducing the expected number of rate cuts next year from four to two, and domestically, political instability due to the presidential impeachment and concerns about economic stagnation remain unresolved, leading to expectations of increased upward pressure on the exchange rate.

Another foreign exchange authority official said, "There are various response measures," but added, "At present, I think responses will be made within the framework already announced." However, they elaborated, "The foreign currency funding market, including dollar borrowing, is stable, so additional market stabilization measures through foreign currency repos (repurchase agreements) are currently unnecessary."