The South Korean won weakened sharply against the U.S. dollar on June 7, reaching levels not seen since the global financial crisis, as foreign investors continued to sell Korean equities and the prolonged Middle East war drove demand for safe-haven dollar assets, according to Seoul foreign exchange market data.
According to the Seoul foreign exchange market, the won-dollar exchange rate rose to 1,549.1 won per dollar at about 10:27 a.m. Thursday before ending daytime trading at 1,539.1 won. In overnight trading early Friday, the rate reached 1,561.5 won per dollar, the highest intraday level since March 2009, when the rate hit 1,597.0 won per dollar during the global financial crisis.
The broad trade-weighted U.S. dollar index stood at 118.9 on June 7, reflecting broad greenback strength that has put pressure on Asian currencies across the board.
Analysts cited three main factors driving the won’s decline. First, foreign investors have been net sellers on the Kospi for 20 consecutive trading days, with total sales this year approaching 120 trillion won (about $77 billion), according to market reports. The selling increases demand for dollars, adding upward pressure on the exchange rate.
Second, a stronger-than-expected U.S. labor market strengthened the dollar by raising expectations that the Federal Reserve could take a more hawkish policy stance. The Wall Street Journal Dollar Index rose during the week after stronger U.S. jobs data, and Treasury yields moved higher. The first Federal Open Market Committee meeting under Federal Reserve Chair Kevin Warsh could reaffirm a hawkish policy stance, contributing to further dollar strength, according to the Korea Trade Insurance Corp.’s June monthly exchange rate outlook.
Third, the prolonged Middle East war has increased global demand for safe-haven assets, adding to pressure on the won. South Korea’s May inflation reached 3.1%, the highest level in more than two years, largely driven by higher petroleum product prices tied to the conflict, the article reported.
As the exchange rate rises, attention is turning to the possibility of a rate increase by the Bank of Korea. Bank of Korea Gov. Hyun Song Shin said late last month that the central bank would need to consider raising the benchmark interest rate, citing exchange rate volatility, housing prices in the Seoul metropolitan area, and household debt risks.
Deputy Prime Minister and Finance and Economy Minister Koo Yun-cheol held an emergency market monitoring meeting with related agencies Sunday to discuss responses to the foreign exchange market. The government said it would improve transparency in offshore non-deliverable forward (NDF) derivative transactions, “judging that one-sided movements in the NDF market can affect the foreign exchange market,” according to a statement from the ministry.
Authorities also plan to review suspected speculative activity and market-disrupting behavior that may be taking advantage of won weakness through inspections by the Bank of Korea and the Financial Supervisory Service.
“The market could see renewed volatility depending on developments in the Middle East war and U.S. price trends,” Koo said in remarks reported by United Press International. “We will monitor market conditions with high vigilance around the clock and swiftly implement measures prepared in cooperation with related agencies.”
Some analysts said the direction of the exchange rate will depend on whether foreign investors continue selling Korean stocks and how U.S. monetary policy develops.