Despite a highly unusual intervention by the Bank of Korea last week, the South Korean won continued to be weak on Wednesday after recording an annual low of 1,190 won to the dollar on Tuesday.
The won bounced back temporarily on Tuesday, but the market fell again in the afternoon to close at 1,189.4 won per dollar, down 1.9 won from the previous day.
The Bank of Korea intervened in the foreign exchange market last week in an effort to prop up the won. Customarily, interventions by Korean monetary authorities have been to weaken the won, rather than strengthen it, in order to promote exports.
However, the move appears to have had little effect.
The won is weakening due to factors beyond the control of Korea, a highly trade-dependent economy. First, it is caused by the strengthening of the dollar, a trend which has emerged as a result of heightened risk-averse sentiment in the wake of the intensifying trade dispute between the US and China, Korea’s top trade partner.
Further downward pressure stems from Korea’s negative GDP growth in the first quarter and North Korean nuclear risks.
Low inflationary pressure and no signs of capital outflow are factors that weaken further potential responses by financial authorities.
Even though there are sound reasons for the won’s deprecation, the depreciation appears steep relative to other currencies.
According to the Bank of Korea, the won saw a 6.0% value fall against the dollar, from 1,115.7 won at the end of last year to 1,187.5 won on the 13th of this month. Bar the Argentinian peso and the Turkey lira, the won posted the most significant decline among major currencies.
Yet South Korea has not suffered from the factors that battered those two economies: Turkey suffered a foreign exchange crisis and Argentina was bailed out by the IMF.
The won is sympathetic to the currency of Korea’s leading trade partner, China. The Chinese yuan remained steady from 6.879 yuan at the end of last year to 6.8811 yuan on the 13th of this month, but has fallen 2.1% since due to the escalating trade conflicts.
|Major Currencies Exchange Rate (Bank of Korea)|
Note: 1) US dollar on an index basis and other currencies are changing their currency value against the US dollar. 2) Index for major currencies (euro, yen, pound, Canadian dollar, Swedish krona, Swiss franc). 3) Index for 26 major trading partners’ currency. 4) Reference data for May 10 due to delayed notification of Fed: Bloomberg, Reuters
“The dollar has been strong since April last year, but the dollar-won exchange rate did not move much,” an official told Asia Times. “However, the dollar-won seems to be looking for a new price level as a number of factors have been reflected since mid-April.”
One factor in the won’s weakness – South Korea’s surprisingly poor GDP results in Q1 – are expected to ameliorate in Q2.
“The first-quarter GDP figures were unexpectedly sluggish, and the real economy is not in a serious condition,” said an official at the Ministry of Strategy and Finance. “Over time, concerns over sluggish indicators are expected to abate.”
However, the weakening trend of the won is unlikely to change.
“There is a strong trend in the global foreign exchange market that distinguishes safe heaven currencies from other currencies, and risk-averse sentiment is prevailing,” said a market expert, suggesting that the won is one of the victims of this sentiment.
Even so, there are no signs of major foreign investment banks trying to revise their outlook for the dollar-won exchange rate, he added.