The won-dollar exchange rate is breaching its upper limits without restraint, climbing to the 1,540 range during intraday trading. The pressure on the won's value has intensified as a series of negative factors converged, including heightened Middle East tensions, a strong dollar driven by expectations of US rate hikes, foreign stock selling, and a weak yen. Some in the market are even forecasting that there is no telling how high the upper end of the exchange rate band could surge.
On Wednesday, the won-dollar exchange rate closed daytime trading (as of 3:30 p.m.) at 1,529.7 won, up 13.3 won from the previous trading day. Based on the afternoon close, this was the highest level since March 31 (1,530.1 won). The exchange rate has remained in the 1,500 range for 13 consecutive trading days. This is the longest stretch since the foreign exchange crisis (December 30, 1997 to March 13, 1998).
The exchange rate opened at 1,530.0 won, up 13.6 won from the previous trading day's close, then surged to 1,530.8 won early in the session. This was the first time the exchange rate began trading in the 1,530 range since March 2009, during the financial crisis.
Subsequently, Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol stated, "We will immediately take necessary measures against excessive herding," and the rate fell to around 1,520 won due to the impact of the foreign exchange authorities' smoothing operation (fine-tuning). However, as large-scale foreign selling of domestic stocks continued, the exchange rate expanded its gains again. Foreigners have net-sold domestic stocks for 19 consecutive trading days since the 7th of last month, and recorded net selling of nearly 7 trillion won on the securities market on this day as well.
The exchange rate continued its steep upward trend in night trading that followed immediately after the daytime session closed. Around 5:05 p.m., it surged to 1,540.3 won, up 10.6 won from the daytime close, marking the highest level in 17 years since March 2009.
The exchange rate was pushed up by a combination of factors, including the reignition of the Middle East war, dollar strength driven by expectations of US rate hikes, and a weak yen. With expectations that the Federal Open Market Committee (FOMC) meeting in the middle of this month will confirm a "hawkish" stance amid inflation concerns, the dollar index rose for three consecutive days, surpassing the 99.5 level. In addition, analysts note that the yen, which tends to move in tandem with the won, fell to the 160 yen per dollar level, acting as a factor that drags down the won's value as well.
Some point out that this is a phenomenon stemming from a "dollar-selling vacuum." With dollar-selling forces such as exporters' nego (negotiation) or intervention by foreign exchange authorities effectively gone while dollar demand continued, the exchange rate surged further.
This is also confirmed by the numbers. Looking at the rate of change of major currencies against the dollar from January 1 of this year to this day, the won fell 6.26%, the largest decline among major currencies including the euro (-1.07%), yen (-1.94%), and pound (-0.28%). This contrasts with the same period during which the Australian dollar (7.04%), yuan (3.03%), and Swiss franc (0.27%) actually showed strength against the dollar.
What market participants are most concerned about is a shift in sentiment. Lee Young-hwa, an economist at BNK Busan Bank, said, "In the 1,510-1,520 range, companies sold dollars relatively comfortably, but if the rate stays above 1,530 won for an extended period, market sentiment could change," adding, "This week and next week are an important watershed." He continued, "Currently, the deterioration in external supply and demand is pushing up the exchange rate, but if domestic sentiment also begins to waver, the same anxiety as at the end of last year could recur," and added, "In that case, it could become difficult to predict the upper end of the exchange rate."
In fact, during the surge in the exchange rate late last year, large export companies in heavy industry, shipbuilding, and semiconductors were found to have stockpiled large amounts of dollars and been reluctant to sell. According to banking sources, during the process of the exchange rate rebounding at that time, companies that sold dollars early suffered losses, after which a "mood of holding or staying" became entrenched. In the current market, there are concerns that if such dollar-hoarding behavior by exporters recurs in this surge, the safety valve preventing further increases in the exchange rate could disappear.
Meanwhile, according to the Bank of Korea, foreign exchange reserves at the end of May stood at $426.99 billion, down $880 million from the previous month, turning to a decline for the first time in a month. This is interpreted as being affected by the authorities' market stabilization measures, such as foreign exchange swap transactions with the National Pension Service. When the National Pension Service makes overseas investments, it needs dollars, and if it borrows from the Bank of Korea through a swap contract rather than procuring from the market, the result is a reduction in foreign exchange reserves.
