OECD: "Won Depreciation Due to Korea-US Interest Rate Gap... Real Exchange Rate at 2013 Level"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The Organisation for Economic Co-operation and Development (OECD) recently pointed to the interest rate differential between South Korea and the United States as the cause of the sharp rise in the won-dollar exchange rate. It explained that the real effective exchange rate still remains at the 2013 level.

Vincent Koen, Acting Deputy Director of the OECD Economic Review Department, said this during a briefing on the '2022 Korean Economic Report' held at the Government Sejong Complex on the 19th.

In response to criticism that the won has recently weakened compared to other currencies, Deputy Director Koen said, "I don't think the won has weakened more steeply compared to the yen," adding, "To properly observe the relative depreciation of the won, we need to look at the current exchange rates of various trading partners together."

He explained, "South Korea's real effective exchange rate is at the 2013 level, which is still much stronger than during the 2008 financial crisis." The real effective exchange rate indicates the extent to which a country's currency has purchasing power relative to other countries' currencies in real terms.

Although the current won-dollar exchange rate is approaching 1,400 won per dollar, reaching levels seen immediately after the 2008 financial crisis, the real effective exchange rate remains at the 2013 level. In 2013, the won-dollar exchange rate fluctuated around 1,100 won.

When asked whether the recent won depreciation could be linked to issues such as South Korea's economic fundamentals or soundness, Deputy Director Koen replied, "The main reason is that the U.S. Federal Reserve (Fed) is expected to raise interest rates significantly, while the Bank of Korea is unlikely to raise rates by such a large margin."

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