Exchange rate that hit 1,429 won…"May fall further to 1,400 won" vs "Unsustainable" [Hankyung FX Market Watch]

The won–dollar exchange rate fell to the 1,440-won range after the foreign exchange authorities' aggressive market intervention. Market participants are watching whether the decline in the exchange rate will continue depending on the authorities' actions. While some forecasts expect the rate to continue falling to the low 1,400-won level, there are also many counterarguments that the authorities' intervention is not sustainable.

Strong government will, additional drop to low 1,400s

On the 26th at the Seoul foreign exchange market, the won–dollar exchange rate fell to 1429 won 50 jeon per dollar around 11:35 a.m. that morning. The rate opened at 1449 won 90 jeon, up 10 jeon, rose intraday to 1454 won, but then fell again. This was understood to be due to the authorities' intervention and the associated caution.

Market participants are paying attention to how far the exchange rate can fall. Generally, the view that the downtrend will continue into next year is prevalent. Because the government's will was strongly displayed, the sentiment to hold more dollars in anticipation of a rise in the exchange rate has been significantly dampened.

Kwon A-min, a researcher at NH Investment & Securities, evaluated that "the authorities showed a strong will not to see 1,500 won, which crushed expectations." He forecasted, "Even if the year-end closing price finishes in the mid-1,400-won range, the possibility of an additional drop to the low-1,400-won range in early next year remains valid."

On the 24th, Park Sang-hyun, a senior advisor at iM Securities, who had described the exchange rate movement as a 'complete victory by the authorities over the market,' explained, "I expect the exchange rate to fall further along with the National Pension Service's foreign exchange hedging activation at year-end and early next year." He expects the year-end closing price to be around 1440 won.

Reasons cited for expecting further declines in the exchange rate include the authorities' determination and the global currency value trends. Asian currencies that move in tandem with the won have recently shown concurrent strength. The yuan recently rose to historical highs, reaching the 6-yuan-per-dollar level, and the yen also strengthened as the Bank of Japan raised rates and verbal interventions from finance officials emerged.

"Difficult to sustain…may be only a short-term effect"

However, there are counterarguments that the exchange rate will be hard to lower significantly. The authorities' suppression of the exchange rate through intervention is not sustainable, and fundamental upward drivers such as expected returns on overseas investments have not disappeared.

Lee Yun-su, a professor of economics at Sogang University, said, "There is no reason for individuals not to invest abroad, and companies also need to increase investment in the U.S.," adding, "When all economic actors are sending money to the U.S., the exchange rate will inevitably rise in the medium to long term."

There is also a view that the government already has this medium- to long-term trend in mind. Jung Yong-taek, an economist at IB Investment & Securities, said, "It should be noted that all government measures are temporary," and interpreted, "In the short term the exchange rate will fall, but the government also knows it must accept a medium- to long-term upward trend." He said one should consider that the decline in the exchange rate may not be large or that rates fallen by year-end could be reversed.

Lee Jin-kyung, a researcher at Shinhan Investment Corp., analyzed, "In the short term, the exchange rate can stabilize downward to the low-to-mid 1,400-won range," but added, "From a corporate perspective, there still seems to be little incentive to convert dollars." She explained, "Fundamental factors will be important for the medium- to long-term exchange rate trend."

Reporter Kang Jin-gyu josep@hankyung.com