Strong Dollar and Added Political Instability... Yoon's Additional Statement Causes Exchange Rate to 'Fluctuate' Again [Hankyung Foreign Exchange Market Watch]

3.3% Decline in Won Value Since November

The value of the Korean won has depreciated by 3.3% since November due to the global strong dollar trend combined with Korea's political uncertainty. The foreign exchange authorities believe that once the uncertainty is resolved, the exchange rate will gradually return to its original position.

According to the 'November International Financial and Foreign Exchange Market Trends' released by the Bank of Korea on the 12th, the won-dollar exchange rate rose from 1,379.90 won at the end of October to 1,426.90 won on the 10th. The won's depreciation rate was 3.3%, which is a significant drop among global currencies.

During this period, the U.S. dollar index rose by 2.3%, causing the value of most countries' currencies to fall. The British pound recorded -1.0%, the Chinese yuan -1.8%, and the Indian rupee -0.9%. The euro depreciated by -3.3%, similar to Korea, due to strengthened expectations of a rate cut by the European Central Bank (ECB) and increased political uncertainty in France. The yen's currency value rose by 0.1%.

Until the end of November, the won-dollar exchange rate showed a very stable appearance compared to other countries. The average daily fluctuation in November was 4.70 won, slightly reduced from 4.90 won in October. The fluctuation rate was 0.34%, ranking first among advanced countries along with Australia (0.34%).

However, after the declaration of martial law on December 3, volatility increased sharply, and the exchange rate rose by about 20 won. Political instability dealt a critical blow to the won.

On the 12th, the won-dollar exchange rate started at 1,429.10 won, down 3.10 won, and fell to 1,428.20 won around 9:30 a.m. However, after President Yoon Suk-yeol's additional statement, it turned upward, moving in the early to mid-1,430 won range in the morning. The statement by President Yoon, asserting the legitimacy of martial law, seems to be increasing market uncertainty.

The foreign exchange authorities expect the exchange rate to stabilize somewhat with the easing of political uncertainty. They forecast that volatility will decrease and the level will slightly come down.

The won-dollar swap rate (3 months), a price indicator in the foreign currency market, rose by 0.022 percentage points from the previous month to -1.62%. The Bank of Korea explained, "Despite domestic political uncertainty, the foreign currency funding situation is favorable," and "the impact on the foreign currency market is limited due to the authorities' market stabilization measures announcement."

Kang Jin-kyu, josep@hankyung.com