The won-dollar exchange rate surged to 1,561.5 won per dollar in nighttime trading Friday, according to the Seoul foreign exchange market. It was the highest level in 17 years and three months since March 6, 2009, during the global financial crisis, when it touched 1,597.0 won intraday. Trading closed at 2 a.m. at 1,559.0 won, up 19.9 won from daytime trading, but market anxiety remains high.
The second-quarter average exchange rate is the highest since the foreign exchange crisis. According to the Bank of Korea (BOK), the average exchange rate through the 5th in the second quarter (based on daytime closing prices) was 1,490.98 won, the highest in about 28 years since the first quarter of 1998 (1,596.88 won). This year's average exchange rate alone stands at 1,477.06 won, exceeding last year's record high of 1,420.97 won.
The financial sector cites several reasons for the won's weakness: large-scale stock selling by foreigners, rising U.S. Treasury yields, dollar strength, and volatility in the non-deliverable forward (NDF) market. Foreign investors have sold off more than 118 trillion won in domestic stocks this year. The possibility of a base rate hike due to U.S. inflation concerns, along with the 10-year U.S. Treasury yield hovering above 4.5 percent annually, is also a factor in the won's weakness. The NDF market has long been cited as a source of won volatility, as trading volume is low and actual currency transactions are not involved.
Importantly, corporate dollar deposit holdings are also playing a part. Corporate dollar deposits at the five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—increased by $8.668 billion from $44.722 billion at the end of March, this year's low point, to $53.39 billion as of the 4th of this month. In contrast, individual dollar deposits decreased by $325 million over the same period, from $12.496 billion to $12.171 billion.
Kim Jin-wook, chief Korea economist at Citibank Korea, analyzed Saturday, "As export amounts themselves have grown larger than in the past, the amount of won conversion by exporters is also increasing." He added, "However, as the dollars earned increase even more sharply, the scale of dollars that companies retain or keep as deposits even after conversion is growing together."
The authorities' assessment is similar. A senior financial supervisory official took aim directly, saying, "They say it's funds waiting to be invested, but companies are keeping the dollars they received as export payments as deposits without converting them," adding, "They believe the won-dollar exchange rate could rise further, so they are deliberately not converting." This is because if the exchange rate surges further, companies stand to gain greater foreign exchange profits.
The problem is that if companies' dollars are not released sufficiently into the foreign exchange market, it could fuel a rise in the exchange rate. When exporters convert dollars received overseas into won, the dollar supply in the market increases.
Currently, with export volumes growing centered on semiconductor companies such as Samsung Electronics and SK hynix, the dollars companies are earning are increasing, recording the largest-ever current account surplus. According to the BOK, Korea's first-quarter current account surplus was $74.4 billion, ranking second in the world after China. Lee Min-hyuk, an economist at KB Kookmin Bank, explained, "With exchange rate volatility increasing, exporters are also adopting a strategy of delaying conversion."
Financial authorities are closely watching companies' dollar deposit holdings. If high exchange rates continue, rising import prices will inevitably increase difficulties for vulnerable groups and domestic demand-oriented companies. This leads to rising market interest rates, acting as a factor that further increases financial burdens.
Lee Nak-won, FX derivatives specialist at NH Nonghyup Bank, forecast, "With market supply and demand concentrated on buying, the exchange rate's upper ceiling should be viewed up to the 1,590 won range, the peak during the global financial crisis," adding, "The exchange rate will fluctuate between 1,470 and 1,600 won in the second half as well."
