The won-dollar exchange rate has dropped nearly 9% over the past six months, reflecting a strengthening of the Korean won. As the dollar's strength has eased since last year and domestic supply conditions have improved, the exchange rate, which once exceeded 1,500 won, has fallen to the mid-1,300s.
On September 16, the exchange rate in the Seoul foreign exchange market was recorded at 1,368.6 won per dollar, an increase of 9.2 won from the previous day's closing price of 3:30 PM. This marks a significant rise in the value of the won, which had been above 1,500 won just two months ago.
The recent decline in the won-dollar exchange rate has been influenced by improved supply conditions in the domestic foreign exchange market and a weakening dollar. Notably, strong semiconductor exports have led to an increase in dollar sales by exporters, contributing to the won's strength.
However, factors are emerging that may limit further declines in the exchange rate. The influx of dollar sales from exporters, which had previously driven the exchange rate down, is becoming uncertain. Additionally, concerns surrounding U.S. monetary policy are growing.
The U.S. Consumer Price Index (CPI) for August rose by 0.4% compared to the previous month. The core CPI, which excludes volatile food and energy prices, increased by 0.3%, surpassing market expectations and raising concerns about the Federal Reserve's tightening policy. Coupled with geopolitical risks in the Middle East and rising international oil prices, there is increasing pressure for a stronger dollar.
International oil prices have surged to around $100 per barrel, reigniting fears of global inflation. If inflationary pressures persist longer than expected, the Federal Reserve's monetary policy may be less accommodative than the market anticipates. This could limit the dollar's weakness and support the lower end of the won-dollar exchange rate.
Internally, the Bank of Korea has expressed concerns that it is difficult to assess the current value of the won based solely on past exchange rate levels.
One monetary policy committee member noted during the August monetary policy direction meeting that there have been ongoing discussions about the appropriate exchange rate level being higher than in the past. There is a need to develop indicators that can assess whether the current exchange rate level and trend are appropriate, reflecting changes in economic conditions such as the development of financial markets.
Particularly, as the effective exchange rate currently used by the Bank of Korea is calculated based on trade weights, there are suggestions to create a new won index that incorporates recent significant increases in domestic investors' overseas securities investments and foreign investors' domestic securities investments.
This indicates that, given the substantial increase in cross-border capital movements compared to the past, the criteria for determining the appropriate exchange rate level may also change. It has become challenging to conclude that the value of the won has increased simply by comparing it to historical exchange rate levels now that it has fallen to the mid-1,300s.
Market sentiment leans toward the possibility of limited further declines in the won-dollar exchange rate or a short-term rebound. As the influence of domestic supply factors weakens, the Federal Reserve's monetary policy, international oil prices, and dollar trends may introduce new variables affecting the exchange rate.
Choi Kyu-ho, a researcher at Hanwha Investment & Securities, stated, "For the time being, we expect the won-dollar exchange rate to stabilize around the 1,320 won level. As the influence of domestic supply factors, which had previously driven a unilateral appreciation of the won, weakens, and with the likelihood of the Federal Reserve raising interest rates, the pressure for a weaker dollar is expected to be significantly limited or may even turn into a stronger dollar in the near future."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.