Won Tops 1,550 Per Dollar, Reaching Highest Since Global Financial Crisis

The won rose above 1,550 per dollar, reaching a level last seen during the global financial crisis. With South Korean authorities signaling a forceful response, attention has turned to where the won-dollar exchange rate goes next. Analysts say stabilization will require external risks, including the Middle East war, to ease. They also point to a moderation in foreign selling of domestic stocks.

According to the Seoul foreign-exchange market on June 9, the won opened at 1,555.2 per dollar on the previous day, up 16.1 won from the prior daytime close. It was the highest opening level since March 6, 2009. The won later gave up its gains and reversed direction. It closed at 1,535.0 per dollar, down 4.1 won from the previous daytime close.

Authorities' verbal intervention appears to have contributed to the won's rebound. The Bank of Korea and the Finance Ministry said recent moves in the foreign-exchange market were driven not only by supply-and-demand factors but also by some speculative offshore foreign-exchange transactions, including non-deliverable forwards, that amplified volatility. They said they would not tolerate excessive volatility or one-sided moves out of line with fundamentals and would respond forcefully.

Brokerages identified foreign selling of South Korean stocks as the main driver of the won's weakness. Kwon A-min, an analyst at NH Investment & Securities, said the current rise in the won-dollar exchange rate is disconnected from improving macro conditions and current-account flows and instead reflects market positioning. He cited sustained foreign net selling in the stock market and related custody dollar purchases as the key factors.

A stronger dollar has also added pressure on the won. Lee Jin-kyung, an analyst at Shinhan Investment & Securities, said safe-haven demand has strengthened amid uncertainty over the Middle East war, keeping the dollar firm against major currencies. Surging oil prices and solid US economic data have also fueled expectations that the Federal Reserve could return to rate hikes, supporting broad dollar strength.

Analysts say the won-dollar exchange rate will need external risks to ease before it can stabilize. Moon Da-woon, an analyst at Korea Investment & Securities, said there is little to do but wait for the factors weighing on the won to be resolved one by one. The biggest turning point for a reversal lower in the exchange rate, he said, would be an end to the US-Iran war, which he described as the starting point of many current problems, along with a weakening dollar. Until then, he said, the upside has no clear ceiling.

Several events that could push the won-dollar exchange rate higher still lie ahead. Kwon said June will bring the European Central Bank policy meeting, the Bank of Japan policy meeting, the Federal Open Market Committee meeting and the MSCI review, which is closely tied to stock flows. Given that schedule, he said, it is difficult to call for near-term stabilization in the won-dollar exchange rate or a quick end to foreign selling.

A moderation in foreign outflows from South Korean stocks is also a condition for stabilization. Lee said foreign investors could return as buyers if portfolio adjustments to South Korea are nearing completion and expectations for an improvement in the global semiconductor cycle hold up. Still, he added, the structural nature of the reduction in holdings makes the timing of any return difficult to predict, leaving uncertainty in place for now.

Even so, most analysts do not view the won's recent weakness as a sign of a financial crisis. Moon said South Korea used to be seen as vulnerable when foreign capital flowed out, but that is no longer the case. Residents are now sending money overseas voluntarily and building up external assets. That process has structurally increased demand for dollars and contributed to the won's sharp depreciation over the past three years.

Lee Su, Hankyung.com reporter, 2su@hankyung.com