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Gov't, BOK step up FX monitoring amid prolonged won slump
Finance Minister Koo Yun-cheol, third from left, poses ahead of a market review meeting at Government Complex Seoul, Thursday. From left are Financial Supervisory Service Governor Lee Chan-jin, Bank of Korea Governor Shin Hyun-song, Koo and Financial Services Commission Chairman Lee Eog-weon. Courtesy of Ministry of Finance and Economy
By Jun Ji-hye
Weak won fuels inflation concerns, increases pressure for earlier rate hike
The government is intensifying its monitoring of the foreign exchange market and reinforcing stabilization measures, repeatedly warning that it stands ready to intervene against excessive one-sided volatility as the Korean won continues to weaken, officials said Thursday.
The officials attributed the heightened exchange rate volatility to geopolitical tensions in the Middle East and profit-taking by foreign investors, who have turned into net sellers following a recent KOSPI rally.
"With external uncertainties remaining high, we are keeping a close watch on market developments to curb growing anxiety and are prepared to act immediately against excessive one-way market moves," Finance Minister Koo Yun-cheol said during a market review meeting with the Bank of Korea (BOK) governor, the Financial Services Commission chairman and the Financial Supervisory Service governor.
The warning came as the Korean currency remained under sustained pressure, with the won staying above the 1,500 won-per-dollar level for nearly three consecutive weeks.
On Thursday, the won opened at 1,530.0 per dollar, weakening by 13.6 won from the previous session, and ended onshore trading at 1,529.7 per dollar, down 13.3 won. It marked the first time the currency had opened above the 1,530-won level since March 10, 2009, during the global financial crisis, when it stood at 1,554.0.
Adding to concerns over market stability, the country's foreign exchange reserves, a key buffer against external shocks, have resumed their decline.
BOK data showed that reserves totaled $426.99 billion at the end of May, down $880 million from a month earlier. The decline reversed April's increase of $4.22 billion, ending a short-lived recovery.
The central bank said the drop largely reflected market stabilization efforts, including the impact of its foreign exchange swap arrangement with the National Pension Service.
A weaker won poses a challenge to inflation. Because Korea depends heavily on imported crude oil and raw materials, depreciating currency raises import costs, which can eventually be passed on to consumers through higher energy prices, manufacturing costs and inflation in the service sector.
Since taking office on April 21, BOK Governor Shin Hyun-song has repeatedly cited exchange rate volatility as a major source of concern for the economy. After chairing his inaugural Monetary Policy Board meeting on May 28, he delivered a stern warning, saying, "We will take a firm stance against excessive one-sided currency movements and will not tolerate such distortions."
Yet the governor's cautionary remarks have failed to stabilize the market, as the won has continued to lose ground against the dollar and the exchange rate has maintained its upward trajectory.
"The won's recent slide has been influenced more by external factors such as dollar strength and geopolitical uncertainties than by weakness in the domestic economy," said Park Sang-hyun, an analyst at iM Securities. "The direction of the exchange rate will largely depend on how strongly the BOK and the government signal their willingness to stabilize the market."
Against this backdrop, the possibility of a BOK rate hike later this year is drawing increased attention.
While the central bank opted to keep its policy rate unchanged last month, two members of the Monetary Policy Board supported an immediate increase. The board's rate projections also indicated that most policymakers have not ruled out additional tightening.
Higher interest rates could provide support for the won by narrowing the interest rate differential with the United States, whose benchmark rate remains 1.25 percentage points above Korea's at the upper end of the target range.
At the same time, however, additional tightening could weigh on the economy by increasing debt servicing costs for households and businesses, potentially undermining the recovery in domestic demand.