Amid Crisis, Won's True Colors Revealed Again... Surpassing 1340 Won Due to Export Slump

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The won-dollar exchange rate surged to 1,340.5 won during trading on the 26th. Although the dollar's upward trend is slowing as the U.S. tight monetary policy nears its end, the Korean won is falling even more sharply, showing signs of weakness. Exchange rate instability could impact rising import prices and the domestic stock market decline, prompting the Bank of Korea and other foreign exchange authorities to closely monitor future developments.

On that day, the won-dollar exchange rate opened at 1,339.1 won, up 6.9 won from the previous day, in the Seoul foreign exchange market. The rate hit a new high immediately after opening and continued its upward trend in the early session, reaching 1,340.5 won. After falling to 1,294.7 won on the 14th, it has surged nearly 46 won in less than two weeks.

The won is experiencing the steepest decline among major currencies. As of 9 a.m. that day, the won's value against the dollar had dropped 2.78% this month. Except for the Russian ruble (-3.35%), which is under Western sanctions due to the war with Ukraine, this is the largest decline among major currencies.

Since the beginning of this year, the won has depreciated 5.59% against the dollar, a larger drop compared to other currencies maintaining ultra-low interest rate policies such as the Japanese yen (-1.73%), Australian dollar (-2.53%), Chinese yuan (-0.51%), British pound (-2.69%), and euro (-2.51%).

The reason the won is showing a 'solo decline' is mainly attributed to the drop in South Korea's export performance. The semiconductor exports, which have supported the economy, continue to underperform, revealing the won's vulnerabilities that were hidden under the status of being a 'top 10 economic power.'

According to the Korea International Trade Association, semiconductors, South Korea's top export item, account for 16.5% of total exports, the highest level worldwide. Due to sluggish exports to China, the country has experienced a trade deficit for 13 consecutive months, increasing economic uncertainty and causing the won to fall alongside.

[Image source=Yonhap News]

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Amid significant uncertainties surrounding the Korean economy, the recent resurgence of crisis rumors about the U.S. First Republic Bank has dampened global risk asset appetite, contributing to the rise in the won-dollar exchange rate.

The dollar index, which measures the dollar's value against six major currencies, stood at 101.80 at 8:30 p.m. on the 25th (local time). While not high compared to the end of last year, global financial instability has reduced incentives to buy the won and strengthened the dollar, leading to further depreciation of the won against the dollar.

Although the won-dollar exchange rate has shown instability recently, South Korea's foreign exchange reserves have fallen below the appropriate level recommended by the International Monetary Fund (IMF) for the third consecutive year. The IMF generally considers 100-150% as an appropriate level of foreign exchange reserves, but last year, South Korea's IMF foreign exchange reserve adequacy index was only 97%.

However, economic authorities remain cautious about resuming the Korea-U.S. currency swap. Bank of Korea Governor Lee Chang-yong told reporters on the 24th, "The currency swap is not an urgent issue to resolve right now." He explained that although the exchange rate is rising, it is not yet at a level of concern.

On that day, the exchange rate slightly gave up some of its morning gains amid foreign exchange authorities' intervention concerns and was fluctuating around the 1,338 won level. Experts say that given the likelihood of continued pessimistic export forecasts, the exchange rate could temporarily rise close to 1,350 won.

Kim Seung-hyuk, a researcher at NH Futures, said, "If the won depreciates more sharply than the dollar's strength, the exchange rate could re-enter the 1,340 won range," adding, "In the global dollar strength environment, the yuan may also weaken, increasing upward pressure on the won-dollar exchange rate."

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