[Weekly Review] Surging 'King Dollar'... Trade Balance in Deficit for the First Time in 10 Years

Won-Dollar Exchange Rate Surpasses 1,380 Won... First Time in 13 Years and 5 Months
Dollar Index Continues Uptrend... Highest in 20 Years
Trade Balance Turns Deficit... Up $6.73 Billion YoY

Exchange Rate Surpasses 1,380 Won for the First Time in 13 Years and 5 Months
(Seoul=Yonhap News) Reporter Im Heon-jeong = On the 7th, when the won/dollar exchange rate surged past 1,380 won for the first time in 13 years and 5 months, employees were working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. On that day, in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,384.2 won per dollar, up 12.5 won from the previous day's closing price. 2022.9.7
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[Asia Economy Sejong=Reporter Lee Jun-hyung] The won-dollar exchange rate soared to unprecedented heights, surpassing 1,380 won for the first time in 13 years and 5 months. Due to the 'King Dollar' phenomenon caused by the U.S.'s aggressive tightening policy, it is anticipated that the exchange rate will soon break through the 1,400 won level. Concerns are also growing over the 'twin deficits,' where both the fiscal balance and current account balance are in deficit, as the domestic goods balance turned negative for the first time in 10 years and 3 months.

According to the foreign exchange market on the 10th, the won-dollar exchange rate closed at 1,384.2 won after surpassing 1,380 won on the 7th. This means the exchange rate exceeded the 1,380 won level just two days after breaking through 1,370 won on the 5th of this month. The last time the exchange rate surpassed 1,380 won was on April 1, 2009 (high of 1,392 won), during the global financial crisis, marking 13 years and 5 months ago.

The recent sharp rise in the exchange rate is due to the global strength of the dollar. The dollar's value has shown extraordinary strength since Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), mentioned at last month's Jackson Hole meeting that the interest rate hike stance would continue. The simultaneous weakening of the yuan and euro, along with supply-demand imbalances, has further fueled the dollar's strength.

Dollar Index Hits Highest Level in 20 Years

The dollar index also surged to its highest level in 20 years. The dollar index measures the value of the dollar against six major currencies. After falling to 72.9 in April 2011, the dollar index has been on an upward trend for 11 years, recently reaching around the 110 level. This is the highest since 2002, right after the dot-com bubble burst.

Domestic companies are on high alert. The steel and aviation industries, which import raw materials in dollars, are already experiencing losses related to exchange rates. If the exchange rate continues its high-level trend for the time being, the foreign exchange losses of the steel and aviation sectors are expected to snowball. The four major conglomerates planning large-scale investments in the U.S. are also facing increased risks as the strong dollar raises their investment costs.

The domestic goods balance recorded a deficit for the first time in 10 years and 3 months. According to the Bank of Korea, the current account surplus last month was $1.09 billion, but the surplus decreased by $6.62 billion compared to the same period last year. This was largely due to the goods balance, which had steadfastly resisted five consecutive months of trade deficits, turning into a deficit. Last month, the goods balance showed a deficit of $1.18 billion, a sharp decline of $6.73 billion compared to the same period last year. The goods balance has not recorded a deficit since April 2012, 10 years and 3 months ago.

Concerns Over 'Twin Deficits'

There are also voices of concern that the 'twin deficits,' where both the fiscal balance and current account balance are in deficit, could become a reality. If the goods balance deficit widens amid rising raw material prices and sluggish exports, the current account balance could also turn negative. The current account had maintained a surplus for 23 consecutive months from May 2020 to March this year but recorded a deficit in April due to the worsening goods balance and overseas dividends.

The fiscal balance is already expected to be in deficit. According to the Ministry of Economy and Finance's 'Monthly Fiscal Trends August Issue' published last month, the managed fiscal balance deficit from January to June this year was approximately 101.9 trillion won. The managed fiscal balance is the integrated fiscal balance (total revenue minus total expenditure) minus four major social security funds, including the National Pension, reflecting the government's actual fiscal condition. The integrated fiscal balance from January to June this year was a deficit of 75 trillion won, an increase of 27.8 trillion won compared to the same period last year.

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