Won-Dollar Exchange Rate Closes at 1109.3 Won... Decline Narrowed by Government Verbal Intervention (Comprehensive)

Closing in the 1100 Won Range for the First Time in 23 Months Since December 2018

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] On the 16th, the KRW-USD exchange rate fell and entered the 1,100 won range. On that day, in the Seoul foreign exchange market, the KRW-USD exchange rate closed at 1,109.3 won per dollar, down 6.3 won from the previous trading day.

This is the first time in about 23 months since December 4, 2018 (1,105.3 won) that the exchange rate has entered the 1,100 won range based on the closing price. The exchange rate started at 1,107.7 won, down 7.9 won, and during the session, it fell by about 10 won to the 1,105 won range.

However, the government verbally intervened, stating that the sharp decline in the exchange rate was excessive, which partially reversed the drop.

An official from the Ministry of Economy and Finance said, "Recent exchange rate fluctuations are at an excessive level," and added, "We will actively respond to movements that artificially induce expanded fluctuations."

There are three main reasons why the Korean won is showing strength. The first reason is the weakness of the US dollar. The US dollar weakened as the United States released dollars to respond to the COVID-19 shock, and this sentiment has been further strengthened by Joe Biden, the Democratic candidate, winning the US presidential election. Expectations of a large-scale economic stimulus package have led to a decline in the dollar's value.

Another reason is the strength of the Chinese yuan, driven by expectations of China's economic recovery and easing US-China trade tensions. Recently, the Korean won has shown a synchronized pattern with the yuan. Experts evaluate that as Korea's economic dependence on China increases, foreign investors in the foreign exchange market view Korea and China as a kind of economic community.

From a supply and demand perspective, Korea continues to run a trade surplus, and foreign investors' preference for risk assets has led to continued net purchases of stocks, which also contributes to the decline in the KRW-USD exchange rate. According to the Bank of Korea, Korea's current account surplus in September was $10.21 billion. Since successfully turning to a surplus of $2.29 billion in May after the COVID-19 crisis, Korea has maintained a surplus for five consecutive months. This is also the largest surplus in two years since recording a $11.24 billion surplus in September 2018. The increase in dollar supply due to the trade surplus inevitably leads to a decline in the exchange rate.

The expectation from the conclusion of the Regional Comprehensive Economic Partnership (RCEP) is also related to the last factor. With the conclusion of RCEP, economic cooperation between ASEAN (Association of Southeast Asian Nations) and Korea is expected to be further advanced, leading to increased exports and a stronger won. In particular, the government expects that in a situation where export momentum has declined due to the US-China trade dispute and COVID-19, the decrease in Korea's exports will be minimized, imports will be restrained, helping improve gross domestic product (GDP), and the restructuring effect of the global value chain (GVC) can also be realized. If the dollar's share is reduced in new economic communities like RCEP, there is a high possibility that the dollar level will be further downgraded, which also supports the dollar's weakness.

Meanwhile, the market argues that some government intervention is necessary as the decline in the KRW-USD exchange rate is too steep. Several verbal interventions have been attempted to calm the decline, but they have not been very effective. Oh Chang-seop, an analyst at Hyundai Motor Securities, said, "The macroeconomic fundamentals themselves favor a decline in the exchange rate, but in the foreign exchange market, speculative forces are entering the won appreciation side through short betting, so herd mentality cannot be ignored," adding, "Only the government can stabilize and curb this psychological aspect."

Oh also said, "This year alone, the exchange rate has dropped significantly from 1,300 won to 1,050 won, and the KRW-USD exchange rate decline cycle has moved within just a few months," adding, "This is quite a burden for exporters and could eventually pose problems for economic recovery, so the government needs to pay attention to this."

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