[Comprehensive] Soaring Exchange Rates to Continue Until Year-End... Emergency Lights On for Korean Economy

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong, New York Correspondent Jo Seul-gi-na, Reporter Moon Je-won] The won-dollar exchange rate surpassed the 1,340 won mark again on the 23rd, triggering alarm bells for the South Korean economy. Amid concerns over a global economic recession, the yen and yuan values of Japan and China also declined simultaneously, breaking the equation that a high exchange rate is beneficial for domestic export companies. Although the foreign exchange authorities intervened verbally for the first time in two months to curb the relentless rise in the exchange rate, considering external conditions and the Korean economic situation, there are concerns that upward pressure on the exchange rate will remain strong until the end of the year.

◆ Won-Dollar Exchange Rate Surpasses 1,340 Again

According to the Seoul foreign exchange market on the day, the won-dollar exchange rate was 1,339.6 won as of 10 a.m., approaching 1,340 won. The exchange rate started trading at 1,341.8 won, up 2.0 won from the previous day's closing price, surpassing the previous day's 13-year and 4-month high of 1,340.2 won once again. Around 9:05 a.m., the exchange rate peaked at 1,345.2 won before fluctuating in the low to mid-1,340 won range.

In response to the steep rise in the exchange rate, the foreign exchange authorities intervened verbally for the first time in about two months. A foreign exchange official stated, "We will closely examine whether there are speculative factors, mainly offshore, in the process of the won-dollar exchange rate rising due to the recent global dollar strength." President Yoon Suk-yeol said during a morning Q&A, "I think the public may be worried about the exchange rate soaring to 1,340 won," adding, "We will manage it well so that the public does not feel anxious." After the intervention by the foreign exchange authorities, the won-dollar exchange rate slightly dropped to the 1,339 won level, but upward pressure remains high.

◆ Strong Dollar Continues Amid Tightening and Recession Concerns

The background to the sharp rise in the won-dollar exchange rate is the extreme risk-averse sentiment driving money into the safe-haven dollar. On the 22nd (local time) in the New York foreign exchange market, the dollar index, which measures the value of the dollar against six major currencies, rose 0.73% from the previous trading day to 108.96. This is very close to the 'highest level in 20 years' of 109.29 recorded in mid-July. At one point during the session, it even exceeded 109.

In particular, the strong dollar on the day was largely due to the pronounced weakness of other currencies, including the euro. The euro's value against the dollar fell by 0.94%, and the parity of '1 dollar = 1 euro' was broken again. At one point during the session, it traded at 0.9928 dollars per euro, marking the lowest level in 20 years. This was due to the sharp rise in natural gas prices, which heightened fears of a recession in the Eurozone (the 19 countries using the euro). The yen, another safe-haven currency, also weakened by 0.37% against the dollar.

The ongoing strong dollar is driven by high-intensity tightening by major central banks and fears of a recession. The belief is spreading that the only reliable safe asset is the US dollar. It is also expected that Federal Reserve Chairman Jerome Powell will reaffirm his tightening stance at the economic symposium 'Jackson Hole Meeting' held this week in Jackson Hole, Wyoming, which is fueling the strong dollar. David Adams, an analyst at Morgan Stanley, predicted, "Chairman Powell's tone at the Jackson Hole Meeting could potentially be an important catalyst for the strong dollar." This also implies that the strong dollar trend may last longer than the market expects.

◆ Exports Hit, Prices Soaring... Emergency for Korean Economy

The strong dollar as the key currency inevitably delivers a direct blow to the overall economies of South Korea and other countries. Already, concerns over a recession have grown in the global financial markets, leading to rapid inflows of investment funds into the US. There are warnings that the strong dollar will worsen economic cycles centered on manufacturing, leading to a decline in global trade → recession concerns → strong dollar as a safe asset, creating a vicious cycle.

Recently, the sharp rise in the exchange rate has pushed up import prices, increasing the burden on Korean companies. In the past, a high exchange rate was perceived as beneficial for exports by enhancing product price competitiveness, but the recent situation is different. Exports increased by only 3.9% compared to the same period last year through the 20th of this month, while the trade deficit surged to 10.2 billion dollars.

Kim Jeong-sik, honorary professor of economics at Yonsei University, expressed concern, saying, "When the exchange rate rises, raw materials must be imported at higher prices than before, offsetting the export effect of the exchange rate increase," adding, "The global economic contraction is negatively affecting South Korea's exports."

The steep rise in the exchange rate is also exerting upward pressure on already high domestic prices. When the exchange rate rises, import prices increase, which can further fuel consumer prices. According to the Korea Economic Research Institute of the Federation of Korean Industries, "Due to recent abnormal weather such as high temperatures, drought, and heavy rain, agricultural production has been poor, and combined with Chuseok prices, inflation anxiety among economic agents is spreading rapidly," forecasting that "consumer prices will peak at 7.0% in September." According to the Bank of Korea's consumer sentiment survey released on the day, the expected inflation rate was 4.3%, down 0.4 percentage points from 4.7% in July, marking a decline for the first time in eight months, but price perception remained at 5.1%, the same as the previous month.

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