To See the Exchange Rate, You Must Read 'Capital Flows'... "Exchange Rate Rise = Crisis, That No Longer Applies" [Issue Interview]

"Even if the won-dollar exchange rate rises sharply, concerns over a dollar shortage have not been observed in the past four to five years. While market fears linger due to past experiences, the mechanism has changed. Countries are now embarking on enormous investments for survival, with governments backing these efforts financially, so it is dangerous to assume that the exchange rate will simply keep rising."

Heejin Kim, Head of the Solution & Trading (S&T) Center at Shinhan Bank, shared this assessment of the current foreign exchange market situation in an interview with The Asia Business Daily on April 17. Since 2023, Kim has been leading Shinhan Bank's dealing room, the S&T Center, overseeing foreign exchange (FX) and derivatives trading. He is a seasoned expert with extensive experience in both risk management and corporate FX business.

Kim Heejin, Head of S&T Center at Shinhan Bank, is giving an interview to The Asia Business Daily. Photo by Yoon Dongju

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Kim noted that the sharp fluctuations of the won-dollar exchange rate since the onset of the Middle East war in late February are more concerning in terms of speed and volatility than the level itself. "What the government is worried about is volatility, especially the short-term speed of exchange rate movements," he explained. "Whenever the rate moves too rapidly in one direction, there is always a big correction, and unnecessary noise can be generated in the process."

He pointed out that situations where the won-dollar exchange rate swings widely in the short term, depending on negotiations between the U.S. and Iran, are especially damaging for businesses. Kim said, "Corporations operate like living organisms 24 hours a day, and they cannot respond when exchange rate volatility grows. Even making business investment plans or signing contracts can become burdensome under such circumstances."

He also emphasized that the old belief that a financial crisis would occur if the exchange rate exceeded 1,500 won is no longer valid. "When there is a problem with dollar liquidity, interest rate discrepancies immediately show up in the FX swap market," Kim explained. "However, over the past four to five years since the initial shock of COVID-19 in 2020, such phenomena have not been observed, even when the exchange rate rose."

He added, "During the COVID-19 period, the United States injected a massive amount of dollars into the market, and domestic companies also have substantial dollar deposits with banks, not to mention the sizable dollar balances held by so-called 'Seohak Ants' (Korean retail investors who invest overseas). Despite lingering fears and caution from past foreign exchange crises and the 2008 global financial crisis-when the won weakened and Korea was disproportionately affected-the current FX swap market remains extremely stable even as the exchange rate rises."

Kim stressed, "For FX risk management, companies should not bet on the direction of the rate, but instead consistently implement steady hedging processes to mitigate volatility."

Kim assessed that large-scale sales of domestic stocks by foreign investors in February and March also contributed to increased exchange rate volatility. "Domestic stocks saw overwhelming gains over the past year, so it appears that foreign investors took profits, a move likely stimulated by war-related shocks," he explained. "Naturally, this partially intensified the weakness of the won."

He further noted that, as selling pressure has eased this month, it is important to observe the equilibrium point between foreign investors' domestic securities investments and domestic investors' overseas investments in order to gauge the future direction of the exchange rate. "Currently, the wave of domestic capital investing abroad has paused temporarily due to the war shock, but considering Korea's low-growth, low-interest environment and the investment boom in U.S. stocks-which are leading technological innovation-this trend is unlikely to be short-lived," he said. "Therefore, we cannot rule out the possibility that structural pressures for a weaker won may re-emerge in the future."

As the correlation between equity investment flows by domestic and foreign investors and the exchange rate has grown, industry professionals are also noticing changes. Kim remarked, "These days, both bond managers and FX traders have to monitor both domestic and foreign stocks. The flow of capital in and out-that is, the capital account balance-has a decisive impact on the exchange rate, and the key indicator is clearly the stock market."

Heejin Kim, Head of S&T Center at Shinhan Bank, is being interviewed by The Asia Business Daily. Photo by Dongju Yoon

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With international oil prices exceeding $100 per barrel due to the ongoing war, some are voicing pessimistic views that the won-dollar exchange rate could surge into the 2,000-won range. However, Kim dismissed this as "an extremely dangerous assumption."

"According to traditional economics, sharply rising international oil prices would naturally lead to a significant increase in the exchange rate," he said. "But we are now in an era of massive investment for survival, with governments supporting these moves through fiscal measures. Therefore, the government can continue efforts to stabilize the exchange rate and interest rates to manage fiscal soundness and ease the burden on companies." He argued that, given the government's stronger commitment to fiscal policy and market intervention than ever before, there is little chance that the exchange rate, prices, or interest rates will spiral out of control according to pure market logic.

Kim added, "Just as the Japanese government implemented a Yield Curve Control (YCC) policy-buying government bonds to lower yields whenever the 10-year government bond yield rose above 1%-this approach could also be adopted by the U.S. or Korean governments," he said. "As fiscal expansion brings the potential for rising exchange and interest rates, and the government's efforts to stabilize them continue to conflict, it seems likely that a new balance point will be found."

Kim emphasized, "With markets moving faster, it has become extremely difficult to make decisions. It is very challenging to prepare for the next three to four years using logic that worked 10 or 20 years ago. Most people today focus solely on economic indicators and market movements, but we must broaden our perspective to include fiscal and political factors." He added, "In particular, we need to pay attention to where government finances are being directed, the direction of industries, and the political context surrounding fiscal policy."

Kim also discussed fundamental measures to boost the value of the won as a way to stabilize the won-dollar exchange rate. He noted that the international status of the won has improved significantly compared to the past.

"Until recently, the won was essentially an NDF currency (traded offshore without physical delivery), so from the perspective of foreign investors, the ease of settlement and transparency were not much different from the Vietnamese dong or Indonesian rupiah," he said. "However, with the government opening up the overnight market and the inclusion of the won in the World Government Bond Index (WGBI), the trading environment has changed significantly compared to a decade ago."

Kim sees the planned 24-hour opening of the FX market this July as an opportunity to strengthen the won's competitiveness. "If Korea's industrial competitiveness and fiscal soundness hold up, more foreign investors will likely add Korean won stocks and bonds to their portfolios," he said. "Rather than remaining trapped in old mechanisms and choosing isolation, we must enhance the won's status through openness to prevent negative side effects."

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