Dollar-Won Holds Near 1,520 Despite Seoul’s ‘Immediate Action’ Warning
Summary
- The government said it used foreign-exchange reserves and verbal intervention to defend the dollar-won exchange rate, but the rise in the exchange rate has continued.
- The exchange rate may be slow to stabilize in the near term as trillion-won-scale net selling by foreign investors and passive fund rebalancing continue.
- Analysts said the rapid rise in South Korea’s stock market capitalization is driving funds out of the market, raising the possibility of a move to 1,550 won, while also pointing to the need for a ceasefire agreement and additional currency-hedging supply.
Forecast Trend Report by Period
South Korean authorities have used foreign-exchange reserves and issued verbal warnings to defend the won against the dollar, but the currency’s decline has shown little sign of easing. Continued selling of domestic stocks by foreign investors is still driving the exchange rate higher.
On June 4, Finance Minister Koo Yun-cheol, who also serves as deputy prime minister, convened an F4 meeting on market conditions and said authorities would “take necessary measures immediately” against excessive one-way moves. The unusual use of the word “immediately” highlighted the government’s determination to steady the market.
The Bank of Korea said the country’s foreign-exchange reserves stood at $426.99 billion at the end of May, down $880 million from the end of April. That means about 9 trillion won, or roughly $6.5 billion, was used to support the currency.
Even so, the dollar-won exchange rate remains in the upper 1,520 won range. That is despite warnings from foreign-exchange authorities on May 22 and from BOK Governor Shin Hyun-song on May 28 that officials would act firmly if needed. One foreign-exchange market specialist said foreign investors sold about 60 trillion won, or roughly $43.4 billion, over the past 20 days, with trillion-won-scale net selling continuing to push the exchange rate higher.
Mechanical rebalancing by passive funds is also continuing, the person added. Authorities may be conducting smoothing operations, but the accumulated foreign selling is so large that the exchange rate may not stabilize quickly.
Min Kyung-won, an economist at Woori Bank, said funds have continued to flow out of the foreign-exchange market as South Korea’s stock market capitalization has risen too quickly. Given the volatility of the past few days, the dollar-won rate could climb to 1,550, he said.
Moon Da-woon, an economist at Korea Investment & Securities, said reaching a ceasefire agreement is the top priority for stabilizing the dollar-won exchange rate. The government also needs to work with the National Pension Service to supply currency-hedging flows to the market, he said.
Nam Jung-min and Shim Sung-mi, Hankyung.com reporters peux@hankyung.com
Korea Economic Daily
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