ED Concerns over weakening won
A foreign exchange bulletin shows Korea's won standing at 1,475 per U.S. dollar on Friday. The continuing depreciation of the won against the dollar, closer to the psychological threshold of 1,500 won, is raising concerns. Yonhap
Four-way consultative gov't body including the National Pension Service should seek for efficiency not expediency
Amid the U.S. tariff whirlwind, the Korean won’s persistent vulnerability had not been considered an urgent concern — until now. When the U.S. announced its "Liberation Day" tariffs on April 2, the won fell to a new low of 1,472 a week later. At the time, however, market sentiment suggested this would be a short-term development that would eventually subside.
The unrelenting depreciation of Korea's currency as the year comes to an end is raising concerns. On Friday, the won closed at a new seven-month low of 1,475.6 against the dollar. On Monday, despite the won rising momentarily in the morning on the expectation that the U.S. Federal Reserve would cut the rate in December, it closed at 1,477.1 won.
For weeks now, analysts have been discussing and debating the possibility of the won breaking through the 1,500 won level, a psychological threshold last reached during the 2009 financial crisis. While few experts believe Korea could cope with the won standing at the 1,500 won level, changes in the structural supply and demand of the dollar are prompting different policy options, including verbal intervention and the government’s plan possibly to request the National Pension Service help stabilize the foreign exchange.
Korea's trade figures for the year look healthy. Its current account, a key trade-related indicator, ran a surplus of $82.8 billion through September.
However, sustained demand for the dollar from both retail and institutional investors in overseas equity markets, along with Korean export firms’ reluctance to convert their earnings into won against the strong dollar, stands behind the won’s downward spiral. Last month, Korean retail investors purchased $6.8 billion, the highest figure since data tracking began in 2011. This month so far, the retail investors purchased $3.63 billion, according to the Korea Securities Depository.
For their part, foreign investors in Korean equities have shifted toward selling, offloading $6.2 billion this month and putting downward pressure on the won.
Against these developments, the Ministry of Economy and Finance, the Bank of Korea, the Ministry of Health and Welfare and the National Pension Service (NPS) met together Monday and formed a four-way consultative body to stabilize the foreign exchange market while minimizing possible loss of NPS resources. The NPS is one of the nation's major institutional investors with a total of 1,322 trillion won ($899.3 billion) in assets, about half of which is invested overseas. Some level of intervention may be needed, but if the government pressures the NPS to carry out FX hedging, it may help stabilize the foreign exchange rate, but could also jeopardize the fund’s long-term sustainability and health.
The change underway in the global supply chain is also set to challenge the conventional wisdom that a cheap Korean won would lead to more exports in the long run. While this year’s trade figures so far do align with the logic, supply chain instabilities will increase the costs of intermediate materials, reducing companies’ future ability to invest. A higher foreign exchange rate generally leads to higher consumer prices and it will ultimately be the consumers to who will bear the burden. Overall, the government, and in particular the financial authorities, should address foreign exchange stability with a far broader perspective than in the past.
The government also needs to assess the structural strength of its equity market as a way to curtail capital outflows, in line with the Lee Jae Myung administration’s goal of supporting a rally of the KOSPI main bourse toward 5,000. Korea’s semiconductor blue-chip stocks are likely to rally, but firms must also improve their productivity and expected earnings to attract domestic investors back to the KOSPI. The foreign exchange issue will become more acute once Korea begins its $20 billion annual investment in the U.S., as part of the $350 billion investment deal linked to the 15 percent U.S. tariff.