Won Falls 6.7% in Two Months... Exchange Rate Volatility Persists

Won-Dollar Exchange Rate Returns to 1,310 Won Range After One Trading Day
Fed '1%p Hike' Expectations Weaken, Causing Pause
However, Exchange Rate Volatility Persists Due to High Economic Uncertainty
Won Falls 6.7% Since June, Outpacing Neighboring Countries

On the afternoon of the 15th, the won-dollar exchange rate is displayed on the electronic board in the dealing room of Hana Bank in Myeongdong. [Image source=Yonhap News]

The won-dollar exchange rate fell back to the 1,310 won level on the 18th. The won-dollar exchange rate, which had been soaring due to strong U.S. economic indicators and a decline in the global dollar index, showed signs of calming down. However, since global economic uncertainty remains high, there are analyses that the exchange rate volatility will increase again.

According to Seoul Foreign Exchange Brokerage on the 18th, the won-dollar exchange rate started at 1,318.3 won, down 7.8 won from the previous trading day. After surpassing 1,320 won on the 15th, reaching the highest level in 13 years and 2 months, it fell back to the 1,310 won level after just one trading day. As of 10 a.m. on the same day, the won-dollar exchange rate was around 1,319 to 1,320 won.

The exchange rate started lower that day due to weakened expectations that the U.S. Federal Reserve (Fed) might raise the benchmark interest rate by 1 percentage point at this month's Federal Open Market Committee (FOMC) meeting. Raphael Bostic, President of the Atlanta Federal Reserve Bank, mentioned at an event held in Florida on the 15th that rapidly raising interest rates could unnecessarily expose weak parts of the economy. Other Fed officials have also expressed discomfort with the recent rapid pace of rate hikes.

The dollar index, which measures the value of the dollar against six major currencies, rose to 108.06, the highest in about 20 years, before falling back to the 107 level. The U.S. retail sales in June increased by 1.0% month-on-month, turning to growth, which somewhat eased recession concerns. Consumption, which accounts for two-thirds of the U.S. real economy and is regarded as a measure of overall economic health, indicates economic outlook.

Seunghyuk Kim, a researcher at NH Futures, explained, "The dollar's strength showed a lull due to improved consumption following better U.S. economic indicators and signals of inflation peaking," adding, "Today, the exchange rate is expected to start lower and settle in the mid-1,310 won range."

However, since inflation remains steep in major countries including the U.S., many analyses suggest that exchange rate volatility will continue for the time being. Looking at the depreciation of various currencies against the dollar from December 31 last year to July 17 this year, the won fell by 10.35%. Although this depreciation is not as large as that of the Japanese yen (-16.87%), British pound (-12.29%), and European euro (-11.35%), since last month the won has depreciated by 6.70%, which is larger than the yen (-6.02%), pound (-4.98%), and euro (-5.28%). It is analyzed that South Korea, being highly export-dependent, reacted more sensitively to recent recession concerns.

On the 17th, citizens are shopping at a large supermarket in downtown Seoul. [Image source=Yonhap News]

In the market, there is an analysis that the upper bound of the won-dollar exchange rate is open up to the next psychological resistance level of 1,350 won. If the U.S. economic slowdown, Japan’s yen depreciation strategy, Europe’s economic contraction, China’s COVID-19 lockdowns, and the Ukraine situation continue, the preference for the dollar is bound to increase.

One of the measures to calm the high exchange rate in the 1,300 won range is the resumption of the Korea-U.S. currency swap agreement. Kwon Seong-dong, acting leader of the People Power Party and floor leader, said at the second high-level party-government meeting the day before, "There is a growing voice that the Korea-U.S. currency swap, which ended during the Moon Jae-in administration, should be resumed." Yang Geum-hee, the party’s floor spokesperson, also said, "It could serve as a brake on the rising exchange rate."

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong will meet consecutively with U.S. Treasury Secretary Janet Yellen in Seoul on the 19th. Attention is focused on whether there will be any mutual understanding regarding the Korea-U.S. currency swap at this meeting. However, the Ministry of Economy and Finance and the Bank of Korea view that since currency swaps fall under the jurisdiction of the central banks of both countries, meaningful progress is unlikely at this meeting.

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