Korean won expected to strengthen against dollar on Korea-US agreement, strong fundamentals

An electronic board shows the Korean currency trading at 1,472.00 won against the U.S. dollar at a currency exchange office in Myeong-dong, Seoul, Friday. Yonhap

The Korean currency is expected to gain against the U.S. dollar, stabilized by the Korea-U.S. tariff agreement that outlined the export-reliant economy’s foreign exchange (FX) stability needs, market watchers said Friday.

The exchange rate, which surged to 1,475 won per dollar, has been and will continue to improve, underpinned by Korea’s strong economic fundamentals, including higher-than-expected gross domestic product (GDP), recovering semiconductor exports and the narrowing interest rate differential between Korea and the U.S., according to analysts.

According to financial market data, the won opened at 1,471.9 per dollar, up 4.2 won from the previous session, before later rising to 1,475 won.

However, the rate later decreased to around 1,455 before noon, after finance minister Koo Yun-cheol vowed to “use available tools” to stabilize the currency volatility.

This was the first verbal intervention by FX authorities since October.

The won closed at 1,457 as of 3:30 p.m. Friday, 10.7 won stronger than the previous session.

Further bolstering the currency was the release of the Korea-U.S. joint fact sheet, which outlined the need to maintain Korean FX market stability.

The fact sheet stated that the agreement “shall not be allowed to give rise to market instability. As trusted partners, the two nations agree that Korea shall not be required to fund an aggregate amount of U.S. dollars greater than $20 billion in any calendar year,” referring to the $200 million cash investment by Korea into the U.S.

The bilateral agreement also stated that Korea “will use its best efforts, to the greatest extent possible, to source the U.S. dollars through means other than market purchases so as to minimize any potential impact on the market.”

It further said that “should it appear that the fulfillment of the commitments may cause market instability, such as disorderly movements of Korean won, Korea may request an adjustment in the amount and timing of the funding, and the U.S. will, in good faith, give due consideration to such request.”

A Korea Investment & Securities report said the recent weakening of the Korean won was influenced significantly by a growing number of Koreans increasing their overseas investment — a short-term factor rather than a fundamental concern.

Many Korean retail investors are purchasing U.S. stocks, boosting short-term demand for U.S. dollars. However, the currency’s weak standing is excessive, since the fundamentals of the Korean economy are strong, the report said.

"Korea’s GDP came in stronger in the third quarter, interest rate differences between Korea and the U.S. are narrowing, and the semiconductor exports are recovering, all factors that should support a stronger won,” it said.

The immediate meaningful resistance level will be around 1,480 won, Standard Chartered Korea strategist Hong Dong-hee said.

“Some say the possibility of 1,500 won against the dollar should not be ruled out, but this scenario is unlikely, unless the U.S. dollar index rises further. All in all, the currency stabilized due in large part to government verbal intervention and the FX market considerations outlined in the joint fact sheet.”

The index measures the value of the U.S. dollar relative to a basket of major global currencies, including the euro and Japanese yen. A higher dollar index means a weaker Korean won.

Similarly, Chang Jae-chul, chief economist at Pinnacle Research Institute, said that no particular warning signals for immediate domestic risks, as indicated by credit market indicators, have been observed.

“The biggest concern surrounding the sharp depreciation of the Korean currency is tied to the capital outflow risk caused by domestic and external credit risks,” he said.

“However, the credit default swap premium, often referred to as a national default indicator, stands at the low-to-mid-20 basis point range."

The figure surged past 45 basis points in April, during the impeachment of former President Yoon Suk Yeol, but has since trended down to around 17 basis points by mid-September.

A rise in the figure means the issuing country’s credit risk is elevated.