Has Korean Gov’t Changed Stance on Won-dollar Exchange Rate?

The Korean won is getting stronger against the dollar. The won-dollar exchange rate fell below 1,100 won during the day for the first time since September 30 last year. 

The won's appreciation is a problem. However, something to notice here is the pace of decline. The won-dollar exchange rate reached 1,145.40 at the end of September but the rise in the won's value after October pushed down the exchange rate below 1,100 won on November 16. Moreover, only the Korean won continues to gain ground against the dollar. According to the Bank of Korea (BOK), the won-dollar exchange rate increased 4 percent for a month and a half after October. This is in contrast to the fact that the value of the Australian dollar against the U.S. dollar dropped 3.2 percent, the British pound 1.7 percent and the Japanese yen 0.2 percent over the same period. The value of the euro and the Malaysian ringgit against the U.S. dollar showed the increase of a mere 0.1 percent and 1.3 percent, respectively. The Chinese yuan and the Singaporean dollar, which show the similar movement with the Korean won, also increased as low as 0.3 percent and 0.2 percent against the U.S. dollar. 

Market experts present a lot of analysis on why only the Korean won shows a rising tendency. To be sure, the home currency appreciation is largely due to favorable economic indicators and less uncertainties. The real gross domestic product (GDP) showed a 1.4 percent growth in the third quarter compared to the previous quarter, hitting a record high after the second quarter in 2010 with 1.7 percent. As exports of semiconductors are picking up, companies see their operating profit surge. The decisive factor is that the geopolitical risk resulting from the North Korean provocations has been still for two months now. As the increased level of foreign investment has led to a huge influx of dollars, the Korean won is getting stronger. In addition, the value of the won is rising as South Korea has signed a standing bilateral currency swap agreement with Canada, one of key currency countries. It means the South Korean foreign exchange market is stable so the won has become more attractive to foreign investors as assets. 

In addition to such external factors, the market is also paying attention to the change of the government’s stance against the exchange rate policy. Even though the value of the won against the dollar surges, the government only controls the pace with vocal intervention unlike the past when it aggressively intervened in the foreign exchange market. The change of its stance can be seen with the movement of the won-dollar exchange rate on the 16th. As the euro got stronger and the dollar got weaker in the offshore market a day before, the value of the won against the dollar fell nearly 10 won (US$0.01) even before the foreign exchange market in Seoul opened. 

As Finance Minister Kim Dong-yeon, who doubles as the deputy prime minister for economic affairs, made the statement of vocal intervention before the market opening, saying, “We will examine thoroughly whether there is an excessive strain for the weak dollar,” the won-dollar exchange rate remained at 1,105 won but it dropped to 1,099.60 won at 3:26 pm with a huge sell-off right before the market closed. The authorities immediately said, “The pace of the won-dollar exchange rate decreases is too fast. We are examining it very carefully.” With the government’s second vocal intervention and smoothing operation, the won-dollar exchange rate bounced back to the level of 1,101 won but it didn’t surpass the level.  

A currency trader from a securities firm said, “There was an intervention movement buying the dollar, which is believed to be the authorities, before the market closed, but the size was smaller than expected. At this rate, the won-dollar exchange rate can go down to the level of 1,090 won tomorrow.” When the government don’t make an aggressive intervention, the market moves with a sense of relief. The latest government’s move is in a striking contrast to the fact that the foreign exchange authorities have actively intervened in the market over the strong won with “high exchange rate” policy after the Lee Myung-bak administration. 

This is because experts believe that the government has changed the direction of its foreign exchange policy. Moon Hong-cheol, an analyst at DB Financial Investment, said, “The drop in the won-dollar exchange rate is the factor that raises the domestic purchasing power and lower domestic companies’ burden of cost. As the new government shows a strong intention to boost domestic demand and the value of the currency of emerging countries is getting stronger according to the global financial market trend, the government is highly unlikely to intervene the market running counter to such trend.” 

However, there is a problem with the export industry. The stronger won can be burdensome for South Korean exporters that need to change their export proceeds of the dollar and the euro to the won. Exporters are putting off exchanging their export proceeds, expecting a turnaround, as the dollar fell sharply against the won after October. According to the BOK, the total resident foreign exchange deposits stood at US73.28 billion (80.34 trillion won) as of the end of October, up US$9.62 billion (10.55 trillion won) from the previous month, reaching a record high in terms of both balance and growth. However, there is growing concerns over the strong won among exporters as the won is expected to remain strong for a while and the government is making the passive intervention in the market.The Korean won is getting stronger against the dollar. The won-dollar exchange rate fell below 1,100 won during the day for the first time since September 30 last year. 

The won's appreciation is a problem. However, something to notice here is the pace of decline. The won-dollar exchange rate reached 1,145.40 at the end of September but the rise in the won's value after October pushed down the exchange rate below 1,100 won on November 16. Moreover, only the Korean won continues to gain ground against the dollar. According to the Bank of Korea (BOK), the won-dollar exchange rate increased 4 percent for a month and a half after October. This is in contrast to the fact that the value of the Australian dollar against the U.S. dollar dropped 3.2 percent, the British pound 1.7 percent and the Japanese yen 0.2 percent over the same period. The value of the euro and the Malaysian ringgit against the U.S. dollar showed the increase of a mere 0.1 percent and 1.3 percent, respectively. The Chinese yuan and the Singaporean dollar, which show the similar movement with the Korean won, also increased as low as 0.3 percent and 0.2 percent against the U.S. dollar. 

Market experts present a lot of analysis on why only the Korean won shows a rising tendency. To be sure, the home currency appreciation is largely due to favorable economic indicators and less uncertainties. The real gross domestic product (GDP) showed a 1.4 percent growth in the third quarter compared to the previous quarter, hitting a record high after the second quarter in 2010 with 1.7 percent. As exports of semiconductors are picking up, companies see their operating profit surge. The decisive factor is that the geopolitical risk resulting from the North Korean provocations has been still for two months now. As the increased level of foreign investment has led to a huge influx of dollars, the Korean won is getting stronger. In addition, the value of the won is rising as South Korea has signed a standing bilateral currency swap agreement with Canada, one of key currency countries. It means the South Korean foreign exchange market is stable so the won has become more attractive to foreign investors as assets. 

In addition to such external factors, the market is also paying attention to the change of the government’s stance against the exchange rate policy. Even though the value of the won against the dollar surges, the government only controls the pace with vocal intervention unlike the past when it aggressively intervened in the foreign exchange market. The change of its stance can be seen with the movement of the won-dollar exchange rate on the 16th. As the euro got stronger and the dollar got weaker in the offshore market a day before, the value of the won against the dollar fell nearly 10 won (US$0.01) even before the foreign exchange market in Seoul opened. 

As Finance Minister Kim Dong-yeon, who doubles as the deputy prime minister for economic affairs, made the statement of vocal intervention before the market opening, saying, “We will examine thoroughly whether there is an excessive strain for the weak dollar,” the won-dollar exchange rate remained at 1,105 won but it dropped to 1,099.60 won at 3:26 pm with a huge sell-off right before the market closed. The authorities immediately said, “The pace of the won-dollar exchange rate decreases is too fast. We are examining it very carefully.” With the government’s second vocal intervention and smoothing operation, the won-dollar exchange rate bounced back to the level of 1,101 won but it didn’t surpass the level.  

A currency trader from a securities firm said, “There was an intervention movement buying the dollar, which is believed to be the authorities, before the market closed, but the size was smaller than expected. At this rate, the won-dollar exchange rate can go down to the level of 1,090 won tomorrow.” When the government don’t make an aggressive intervention, the market moves with a sense of relief. The latest government’s move is in a striking contrast to the fact that the foreign exchange authorities have actively intervened in the market over the strong won with “high exchange rate” policy after the Lee Myung-bak administration. 

This is because experts believe that the government has changed the direction of its foreign exchange policy. Moon Hong-cheol, an analyst at DB Financial Investment, said, “The drop in the won-dollar exchange rate is the factor that raises the domestic purchasing power and lower domestic companies’ burden of cost. As the new government shows a strong intention to boost domestic demand and the value of the currency of emerging countries is getting stronger according to the global financial market trend, the government is highly unlikely to intervene the market running counter to such trend.” 

However, there is a problem with the export industry. The stronger won can be burdensome for South Korean exporters that need to change their export proceeds of the dollar and the euro to the won. Exporters are putting off exchanging their export proceeds, expecting a turnaround, as the dollar fell sharply against the won after October. According to the BOK, the total resident foreign exchange deposits stood at US73.28 billion (80.34 trillion won) as of the end of October, up US$9.62 billion (10.55 trillion won) from the previous month, reaching a record high in terms of both balance and growth. However, there is growing concerns over the strong won among exporters as the won is expected to remain strong for a while and the government is making the passive intervention in the market.