Dollar-Won Stays Elevated Despite Seoul’s ‘Immediate Action’ Warning as Foreign Selling Continues
Summary
- The government said it used foreign-exchange reserves and stepped up verbal intervention to defend the dollar-won exchange rate, but the upward trend in the exchange rate has continued.
- Continued trillion-won-scale net selling by foreign investors and rebalancing by passive funds are pushing the increase in the exchange rate higher, making near-term stabilization difficult.
- Analysts cited the rapid rise in the domestic stock market’s market capitalization, the possibility that the exchange rate could climb to 1,550 won, and the need for a ceasefire agreement and additional currency-hedging supply.
Forecast Trend Report by Period
South Korean authorities have drawn on foreign-exchange reserves and stepped up verbal intervention to defend the won, but the dollar-won exchange rate has yet to retreat. Continued selling of domestic stocks by foreign investors is still fueling the currency’s weakness, according to market participants.
On June 4, Deputy Prime Minister and Finance Minister Koo Yun-cheol convened a market monitoring meeting of top economic policymakers and said the government would “immediately take necessary measures” against excessive one-way moves. The unusual use of the word “immediately” highlighted the government’s determination to stabilize markets. Bank of Korea data showed the country’s foreign-exchange reserves stood at $426.99 billion at the end of May, down $880 million from a month earlier. That means roughly 9 trillion won, or about $6.5 billion, was used to defend the currency.
Even so, the dollar-won rate has remained 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 they would respond firmly if needed. One foreign-exchange market specialist said foreign investors had sold about 60 trillion won, or roughly $43.5 billion, over the past 20 days. Trillion-won-scale net selling has continued to push the exchange rate higher, the person added.
Mechanical rebalancing by passive funds is also continuing. While foreign-exchange authorities are likely conducting smoothing operations, the accumulated foreign selling is so large that the exchange rate may not stabilize quickly, the specialist said.
Min Kyung-won, an analyst at Woori Bank, said funds have continued to leave the foreign-exchange market as South Korea’s stock market capitalization has risen too quickly. Judging by volatility over the past few days, the exchange rate could rise as high as 1,550 won per dollar, he said.
Moon Da-woon, an analyst at Korea Investment & Securities, said reaching a ceasefire deal was the top condition for stabilizing the dollar-won exchange rate. He added that the government needs measures such as working with the National Pension Service to release currency-hedging volume into the market.
Nam Jung-min and Shim Sung-mi, Hankyung.com reporters peux@hankyung.com
Korea Economic Daily
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