Korean currency remains unusually weak as exports remain weak

Korean won and U.S. dollar [Photo by Han Joo-hyung]

The South Korean won remains unable to find momentum for recovery as it continues to mirror the dollar’s prolonged weakness.

According to Bloomberg on Sunday, the U.S. dollar has been showing a weak trend since the bankruptcy of Silicon Valley Bank in March. The dollar index, which represents the value of the dollar against six major countries’ currencies, fluctuated in the range of 101 to 102 this month, and fell to the lowest intraday level of 100 for the first time in a year. The dollar index soared to 105.66 on March 8 from 101.22 on Feb. 1, but fell back to 101.82 on April 21.

In late January and early February, when the dollar index was hovering around 101, the Korean won against the dollar traded between 1,220.3 won to 1,231.7 won. However, when the dollar index returned to the early February level on April 21, the parity rate hit a record low of 1,328.2 won. Considering the dollar index, the won’s value is undervalued by 100 won compared to other currencies.

Among the major currencies, the Korean won has suffered the biggest decline. Over the past month, the Korean won fell by 1.296 percent against the U.S. dollar, the second-largest drop among 11 Asian currencies after the 2.786 percent decline in the Philippine peso.

Experts blame the Korean won’s unusual weakness on internal factors. The biggest factor is the country’s trade deficit due to poor exports. South Korea’s trade balance is expected to be in the red for the 14th consecutive month from March last year to this month, as semiconductors and outbound shipments to China, South Korea’s key export market, show no signs of improvement.

Corporate dividends paid to foreign investors, which were heavily concentrated in April, also contributed to the weakness of the Korean won. Demand for the dollar increased as foreign investors repatriated their dividends instead of reinvesting them in domestic stocks.

The weak performance of the yuan, which was expected to strengthen, was also a contributing factor, while several recent interventions by foreign-exchange authorities have failed to put the brakes on the won’s decline. The Bank of Korea recently signed a $35 billion foreign exchange swap with the National Pension Service on April 13 to minimize the impact on the market from the pension fund’s demand for dollars.