Trade Deficit Culprit
Recently, the won-dollar exchange rate has fluctuated the most among major currency exchange rates. This sharp change in the value of the won has been blamed on Korea’s trade deficit.
According to the Bank of Korea (BOK)’s June Monetary and Credit Policy Report, the rate of changes in the won’s exchange rate against the U.S. dollar from August 2022 to the beginning of 2023 was twice the average of the rates of changes in other major currencies’ exchange rates against the U.S. dollar.
In particular, the rate of the depreciation of the won was more than double that of other currencies and the largest among the 34 major economies’ currencies that the BOK chose for a comparison in February. This means that the won fell most sharply among those major currencies.
According to the BOK’s latest graph of the rate of changes of the won’s exchange rate against the U.S. dollar, the won depreciated by 7.4 percent, compared to a 3.0 percent depreciation of the U.S. dollar and a 2.7 percent depreciation of the average of 34 countries’ currencies in February. The won’s change was more than double the average of major currencies’ changes.
The BOK pointed the finger at Corporate Korea’s widening trade deficit this year as the biggest culprit behind the won’s greatest depreciation among the world’s major currencies.
The BOK named reasons behind the change in the won’s exchange rate. “An impulse response analysis showed that Korean and foreign interest rate differentials and trade balance shocks affect the won’s exchange rate in a negative direction (appreciation) and CDS premiums in a positive direction (depreciation),” the BOK said.
“A big portion (40 percent) of the unexpected appreciation of the won in February is explained by Korea’s trade balance shock,” the BOK said. “Expectations for a tighter monetary stance by the U.S. Federal Reserve (Fed) also served as an additional depreciation factor.”
“Thailand, South Africa, Argentina, and Russia, the trade balances of which deteriorated significantly earlier this year, also experienced relatively large currency depreciation, as did Korea during a stronger U.S. dollar in February,” the BOK added.
According to the Ministry of Trade, Industry and Energy (MOTIE) in March, Korea’s exports totaled US$50.1 billion and Korea’s imports US$55.4 billion in February, resulting in a trade deficit of US$5.3 billion in the month. As of February, Korea recorded a trade deficit for 12 consecutive months. This trend is continuing at present. In May, Korea recorded a trade deficit of US$2.1 billion, marking the 15th consecutive month of trade deficits.