[Exchange Rate 1400 Won] Soaring Exchange Rate Due to King Dollar... "Urgent Need for Korea-US Currency Swap"

Won-Dollar Exchange Rate Expected to Rise for a While
Strong Dollar Deepens Weakness of Asian Currencies
Growing Need for Korea-US Currency Swap
Choo Kyung-ho on Exchange Rate Instability: "All Means Will Be Mobilized"

The U.S. Federal Reserve (Fed) has reaffirmed its high-intensity tightening stance, spreading concerns over the won-dollar exchange rate. Although the government and the Bank of Korea plan to use all available measures to stabilize the foreign exchange market, the strengthening dollar, growing worries about economic slowdown, capital outflows, and the possibility of offshore speculation have raised forecasts that the won-dollar exchange rate could soar above 1,450 won. Accordingly, voices calling for the Korea-U.S. currency swap, which has served as a 'safety net' during past crises, have grown louder in the market.

According to the financial market on the 22nd, the won-dollar exchange rate surpassed 1,400 won for the first time since the financial crisis in the morning, continuing its high-level rise due to the aftershocks of the Fed's interest rate hike. The Fed implemented its third 'giant step' (a 0.75 percentage point increase in the benchmark interest rate) at the Federal Open Market Committee (FOMC) and announced its intention to maintain a hawkish (monetary tightening preference) stance, intensifying the strong dollar phenomenon. The dollar index, which measures the value of the dollar against six major currencies, rose to around 111, the highest level in 20 years.

The won-dollar exchange rate is expected to continue its upward trend for the time being. The strong dollar has caused other Asian currencies such as the Japanese yen and Chinese yuan to fall significantly, encouraging won depreciation, and the strong dollar is expected to persist until next year. In particular, South Korea recently recorded the largest trade deficit ever, and the current account balance is also threatened with turning into a deficit, causing the won to depreciate more than other currencies. If concerns about economic slowdown due to sluggish exports grow, won weakness could intensify.

The 0.75 percentage point reversal in the Korea-U.S. interest rate gap due to the Fed's giant step is also a negative factor for the exchange rate. This is because foreign exchange outflows and expectations of won depreciation can mutually influence each other, potentially starting a vicious cycle. If speculative sentiment spreads in the offshore New York Non-Deliverable Forward (NDF) market due to expectations of exchange rate increases, volatility could reach levels seen during the 2008 financial crisis.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is taking a commemorative photo with participants at the "Emergency Macroeconomic and Financial Meeting" held on the 22nd at the Bankers' Hall in Jung-gu, Seoul. From the left, Lee Chang-yong, Governor of the Bank of Korea; Deputy Prime Minister Choo; Kim Ju-hyun, Chairman of the Financial Services Commission; Lee Bok-hyun, Governor of the Financial Supervisory Service. Photo by Moon Ho-nam munonam@

In response, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong held an emergency macroeconomic and financial meeting on the same day and stated they would mobilize all policy measures to stabilize the exchange rate, but experts point out that it will be difficult to stop the rising trend. Deputy Prime Minister Choo said, "Recently, dollar demanders are pre-buying while sellers are delaying sales," adding, "The government will strictly adhere to the principle of responding firmly and swiftly at the necessary moment by using all available means."

In the market, calls are growing to establish braking measures such as the Korea-U.S. currency swap before the won's depreciation accelerates further. This is because the two Korea-U.S. currency swap agreements signed in 2008 and 2020 had significant effects, stabilizing the foreign exchange and stock markets. However, there is analysis that the possibility of the U.S. agreeing to a currency swap deal exclusively with South Korea is low, reducing the likelihood of realization. Instead, the Bank of Korea is seeking alternatives, such as pursuing a currency swap agreement with the National Pension Service for the first time in 14 years.

Governor Lee said on the day, "We are responding to the excessive movement and concentration in the exchange rate compared to our economic fundamentals," adding, "However, since this is a common global issue, please compare it with other countries." This is interpreted as meaning that since the won's depreciation this year is not significantly larger than that of other currencies, there is no need to be excessively anxious about the recent exchange rate rise.

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