Sharp Currency Surge... Slight Calm Following Authorities' Remarks on "Measures Against Excessive Exchange Rate Imbalance"

Government Bond Yields Plunge... 5-Year Bonds Fall Below Base Rate

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] As confirmed cases of the novel coronavirus infection (COVID-19) surge, the won-dollar exchange rate continues its sharp rise. This is due to increased uncertainty in the financial markets caused by COVID-19 and a preference for safe-haven assets.

On the 24th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,215.5 won, up 6.3 won from the previous trading day. Shortly after the domestic foreign exchange market opened, at 9:06 a.m., the won-dollar exchange rate surged to 1,218.3 won, but the increase slowed after Kim Yong-beom, the 1st Vice Minister of Strategy and Finance, stated, "If the exchange rate imbalance expands excessively, necessary measures will be taken." As of 10:16 a.m., the won-dollar exchange rate is trading in the high 1,216 won range.

The authorities interpret the sharp rise in the won-dollar exchange rate as a result of the dollar's strength in the global foreign exchange market. After concluding the expanded macroeconomic financial meeting held at the Bankers Hall in Myeongdong, Seoul, Kim said to reporters, "currencies other than the dollar are showing weakness to the extent that even the yen is weakening," adding, "We need to consider whether this is due to Korea's unique circumstances or a result of major movements in the international financial market." This suggests that it is premature to conclude that the won's depreciation is solely due to the surge in COVID-19 cases in Korea. The dollar index, which measures the value of the U.S. dollar against six currencies including the euro, yen, and pound, is approaching the 100 mark. Kim emphasized, "We are closely monitoring the foreign exchange market situation, and when market volatility abnormally increases, we will respond swiftly and decisively according to the prepared contingency plan."

On the same day, government bond yields also showed a sharp decline in the early session. As of 9:30 a.m. in the Seoul bond market, the 3-year government bond yield fell 3.0 basis points (1bp = 0.01 percentage points) from the previous trading day to 1.157% per annum, and the 5-year government bond yield dropped 4.1 basis points to 1.229% per annum. The 3-year yield fell below the Bank of Korea's base rate (1.25% per annum) as of the close on the 21st, and the 5-year yield also fell below the base rate during the session. The 10-year yield declined 3.8 basis points to 1.409% per annum. The 20-year and 30-year yields fell 2.9 basis points and 3.7 basis points, respectively, recording 1.448% and 1.450% per annum.

The fact that government bond yields have fallen below the base rate is interpreted in the financial market as reflecting expectations of a rate cut by the Bank of Korea. The Bank of Korea will decide the base rate at the Monetary Policy Committee meeting scheduled for the 27th.

This content was produced with the assistance of AI translation services.