The foreign currency market here is in trouble. The Korean won is rising too fast and high with the comparative value of the U.S. dollar plunging steeply.
The exchange rate at the market has been moving around 1,054 won per dollar lately, hitting its highest level in three and a half years. Market watchers say the parity rate will fall to 1,050 won soon and threaten to break the 1,000-won threshold.
The won's strength should not be astonishing, given strong exports, a healthy current account surplus and the rapid progress in denuclearizing North Korea. Seoul also has deep foreign exchange pockets of $400 billion.
A sense of uncertainty lingers in the market, however. Many analysts see some “external” factors outweighing simple market theory based on the supply and demand of currencies. Most noticeable is the influence of the foreign currency report the U.S issues every April and October. The Korean government cannot intervene in the market, out of concerns the U.S. will designate Seoul as a currency manipulator in the twice-yearly reports.
The problem is the won's rapid rise is likely to continue. The Donald Trump administration is maintaining the weak dollar policy, under a temporary endorsement by China, Japan and the EU. This year alone, the won has climbed about 40 won from 1,091 won recorded on Feb. 8. That also marked a massive gain from the 1,157 won recorded as recently as last August.
The foreign exchange rate is the single most significant factor affecting exports. A 1 percent rise in the won's value leads to a 2 percent cut in the operating profit of semiconductor exporters and a 4 percent drop in the profits of automakers. Add to this the rising international oil price and the interest rate as well as perennially weak domestic demand, and Korea Inc. will fall into a perfect storm of economic trouble.
And this explains why financial authorities here should step into the market with a smoothing operation. Maintaining the transparency of Seoul's currency policy is one thing but protecting domestic industry from currency fluctuation is another.