[Why&Next] "Barely Lowered, but..." The Unrelenting Surge in Exchange Rate in the New Year?What's Behind It?

Exchange Rate Rises for Nine Consecutive Trading Days... Up 43.9 Won
Despite Strong Warnings, Government Intervention Lasts Only Three Days
Supply-Demand Imbalance Unresolved... Strong Dollar and Weak Yen Persist
Underlying Driver: Expectat

The won-dollar exchange rate, which had stabilized following aggressive market intervention by foreign exchange authorities at the end of last year, has begun to surge again with the start of the new year. After rising for nine consecutive trading days since the end of last year, it quickly surpassed the 1,470-won mark. Although authorities had managed to temporarily lower the exchange rate through intervention, it has ultimately returned to December levels. Analysts attribute this to the resurgence of expectations for a rising exchange rate at the start of the year, which had seemed to subside temporarily due to the government's intervention using all available policy tools. The continued weakness of the yen, which tends to move in tandem with the won, is also fueling the rise in the exchange rate. Experts predict that the upward trend will continue, potentially approaching the 1,480-won level, where the government previously intervened.

"Even at the beginning of the year, the rate remained in the 1,440-won range, defying market expectations"...A sharp rise of nearly 50 won

According to the Seoul foreign exchange market on January 14, the won-dollar exchange rate’s weekly closing price rose for nine consecutive trading days from December 30 to January 13. The rate, which had hovered around 1,440 won, closed at 1,473.7 won as of the previous day. This marks an increase of 43.9 won over nine trading days, with the previous day's closing price reaching the highest level since December 23 (1,483.6 won).

The upward trend continued on this day as well. The won-dollar exchange rate opened at 1,477.2 won, up 3.5 won from the previous trading day, and continued to climb as of 9:30 a.m.

On December 24 of last year, the exchange rate fell below the 1,450-won mark for the first time in three years and one month, recording the largest drop due to aggressive intervention by foreign exchange authorities. By December 29, it had dropped to 1,429.8 won. At that time, experts noted that authorities had succeeded in curbing expectations for a rising exchange rate, predicting it would remain in the 1,440-1,450 won range for a while. However, the rate has been climbing throughout the new year, once again threatening the 1,480-won level where the government previously intervened. Market participants also note that "it is becoming increasingly difficult to predict the direction compared to previous years."

The rising exchange rate driven by high-rate expectations...Supply-demand imbalance remains unresolved

Yonhap News Agency

Experts agree that the recent rise in the exchange rate is due to the structural supply-demand imbalance, which has not been resolved and was the underlying reason for the prolonged period of high rates. As the exchange rate fell due to government intervention, individual investors increased their overseas investments, and importers expanded their dollar purchases, leading to a significant rise in dollar demand. In contrast, exporters have been reluctant to sell dollars, a trend that has continued into the new year.

In fact, the net investment by domestic residents in U.S. stocks has increased again this year. According to the Korea Securities Depository, from January 1 to 13, the net purchases of U.S. stocks by domestic individual investors amounted to 2.2162 billion dollars. This is the highest figure for the same period since statistics began in 2011. Compared to the same period last year, when there was a frenzy for U.S. stocks (1.54881 billion dollars), this represents a 42% increase. Lim Hwanyeol, a researcher at Woori Bank, explained, "As the exchange rate fell, individual investors and importers actually bought more dollars during this period, which pushed the rate higher," adding, "The renewed expectation that U.S. stocks will rise again is driving continued net purchases of U.S. stocks."

Meanwhile, exporters have not released their negotiation volumes (dollar sales) into the market. Lim noted, "Initially, it was expected that exporters would sell a large amount of dollars after the government’s intervention, but that did not happen," adding, "One of the reasons for the government’s intervention, the supply-demand issue, remains unresolved, and since only a temporary adjustment occurred, the underlying structure has not changed, leading to a rebound."

There are also observations that this structural supply-demand imbalance is underpinned by expectations that the exchange rate will rise further. Park Jiweon, Associate Research Fellow at the Korea Institute for International Economic Policy (KIEP), stated in a recent report, "Since 2021, the prolonged strength of the dollar and expansion of overseas investment have reinforced expectations for a rising exchange rate," adding, "The recent continued surge in the exchange rate is also due to these heightened expectations for further increases." Lim also commented, "Exporters are holding onto dollars because there is still anxiety about the exchange rate," and "With the expansion of overseas investment, the tendency to hold dollars has strengthened, and as further increases are expected, they are reluctant to release their holdings." In addition, external factors such as the weak yen and the strong dollar phenomenon caused by instability in the Middle East are also unfavorable for the won.

Whether the rate will break through 1,480 won is key..."The government must earn trust through consistent policy"

Experts expect the upward trend in the exchange rate to continue for the time being and advise that attention should be paid to whether it will break through the 1,480-won level, where the government previously intervened. As market participants remain wary of government intervention, 1,480 won is likely to serve as a critical threshold, and if it is breached, the likelihood of renewed intervention is high.

Baek Seokhyun, a researcher at Shinhan Bank S&T Center, stated, "Although U.S. inflation in December was lower than expected, risks from the Iran situation and rising oil prices in the Middle East are weighing on the won," adding, "With the additional pressure from the weak yen, the exchange rate is expected to fluctuate around 1,478 won today." Lim noted, "Since the rate has quickly risen to 1,470 won, the short-term momentum for further increases is strong," but also assessed, "Given that the won’s weakness is excessive compared to Korea’s fundamentals, 1,480 won is likely to be the peak. The market is also aware of the government's intervention stance."

There are also calls for consistent policy responses to restore confidence and stabilize the exchange rate. Park pointed out, "As the influence of external and structural factors increases, it becomes more difficult for foreign exchange authorities to directly control shocks, so it is important to build trust among economic agents through consistent responses." He also suggested, "In principle, the exchange rate should be determined by the market, but authorities should only intervene to support orderly trading when extreme imbalances undermine market function, and transparency should be enhanced to prevent intervention from being perceived as routine."