Rising Exchange Rates Alongside 'High-Flying' Oil Prices... Fueling Inflation?

Exchange Rate Surpasses 1,200 Won Mark with Upward Trend
Negative Impact on Domestic Inflation Concerns
Dollar Pauses Slightly Following Powell's Remarks
However, Prolonged Ukraine Conflict May Worsen Instability

As the Ukraine crisis prolongs and Western sanctions against Russia, including those by the United States, intensify, the KRW-USD exchange rate is also experiencing increased volatility. The exchange rate has surpassed the psychological resistance level of 1,200 won for four consecutive days based on closing prices, and some analysts suggest that breaking through the 1,220 won level is only a matter of time. If the exchange rate rises excessively amid soaring international oil prices, it is expected to have a significant ripple effect on the economy by not only adversely affecting domestic inflation but also increasing downward pressure on exports.

According to the Seoul foreign exchange market on the 3rd, the KRW-USD exchange rate opened at 1,204.2 won, down 1.9 won from the previous trading day. Although the opening price was somewhat subdued, the exchange rate has shown an upward trend, exceeding 1,200 won for four consecutive trading days since rising to 1,202.40 won on the 24th of last month based on closing prices. Recently, it even rose to 1,208 won during intraday trading, approaching the secondary psychological resistance level of 1,210 won. Among experts, there are forecasts that the exchange rate could rise above 1,220 won as the prolonged Russian invasion of Ukraine increases the preference for safe-haven assets.

When the KRW-USD exchange rate rises, the price of imported raw materials and components converted into Korean won also increases, inevitably leading to domestic inflation. Moreover, with international oil prices recently breaking through $110 during intraday trading, inflationary pressures are intensifying, and the exchange rate increase effectively amplifies the impact of high oil prices.

Export companies are also facing a challenging situation. Generally, a rising KRW-USD exchange rate improves the price competitiveness of domestic export companies, helping to improve the current account balance. However, if the rise in the exchange rate causes imported raw material prices to increase excessively, it can lead to product price hikes, which may act as downward pressure.

Jinwook Heo, a research fellow at the Korea Development Institute (KDI), explained, "The Russia-Ukraine risk is expected to exert upward pressure on the KRW-USD exchange rate," adding, "If the preference for safe-haven assets strengthens, the possibility of the exchange rate rising further cannot be ruled out." Heo also noted, "Although exports have shown good performance in terms of value since the second half of last year, the growth in volume has slowed. There are many risk factors in the manufacturing sector, and with the Ukraine crisis added, the downside risks to exports may increase."

Seokhwan Kim, a visiting professor at Hankuk University of Foreign Studies, pointed out at a crisis briefing on the Ukraine situation hosted by the Korea Institute for International Economic Policy (KIEP), "For the Korean economy, the exchange rate is ultimately more important than trade volume or investment. If the exchange rate fluctuates wildly, the trade deficit could worsen, and defending the exchange rate may become difficult, so there is a high possibility of facing a crisis soon after the new government takes office."

Although the US dollar showed a slight weakening trend on the 2nd (local time) after Federal Reserve Chairman Jerome Powell expressed support for raising the benchmark interest rate by 0.25 percentage points at a congressional hearing, he also described the Ukraine crisis as a potential "game changer," suggesting that exchange rate instability is likely to continue for the time being.

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