KRW weakens amid strong USD, sluggish Chinese economy

South Korea’s 50,000 won banknotes, left, and U.S. 100 dollar banknotes. [Photo by Han Joo-hyung]

The South Korean won is weakening against the U.S. dollar after several weeks of fluctuation, reaching the ranges of 1,200 won and 1,300 won, suggesting increased downward pressure on the Korean economy.

The local currency experienced ups and downs over the past couple of months. On June 1, the Korean won stood at 1,321.6 won per U.S. dollar and then rose to 1,271.4 won on June 13.

The currency then fell to 1,317.7 won on June 30 and reached 1,260.4 won on July 17. On August 11, the Korean won was traded at 1,324.9 won per greenback.

In June, the average daily fluctuation stood at 6.6 won, which was reduced to 5.4 won in July. However, the fluctuation began to grow in August.

During the month, the Korean won has experienced shifts exceeding 10 won on nearly one out of every nine trading days. Intraday movements surpassing 10 won carry significant psychological implications.

The won-dollar annual fluctuation averaged 6.2 won during the first half of this year, smaller compared with the same period in the previous year of 6.3 won. But it surpassed the levels observed in prior years, including 3.6 won in 2021 and 5 won in 2022 amid the strong U.S. dollar and weaker economic fundamentals in the Korean economy.

Foreign exchange experts see the recent depreciation of the Korean won as a significant warning given that the recurrence of the 1,300 mark has been historically associated with foreign exchange crises and global financial downturns.

The driving factor behind the won’s depreciation involves soaring yields on U.S. treasury bonds. Experts warn that the Korean won may plummet further to break the 1,350 won level.

The Chinese yuan is another factor pressuring the won’s weakening. The yuan has been undergoing a weakening trend following the recent breach of the closely watched 7 yuan-per-dollar level in mid-May.

Market insiders are paying attention to how long the U.S. Fed will keep the rates at the current high levels, citing the chance that the Fed could hike the rates once more, given the recent fluctuations in the international oil price and grain price. Such circumstances could lead Korea to suffer higher import prices if the ongoing weak Korean won persists.

Many experts, in the meantime, project a gradual recovery of the Korean won per dollar.

“The won may find itself on a strengthening trajectory if indications emerge that the U.S. rate hike cycle is approaching its conclusion,” said Baek Seok-hyun, an economist at Shinhan Bank.