Korean won falls to 1,390 per dollar amid delayed U.S. rate cut prospects

[Photo by Lee Chung-woo]

On June 21, the Korean won fell to the 1,390 won range per U.S. dollar for the first time in two months, driven by expectations that the U.S. Federal Reserve may delay interest rate cuts. As the won approached the psychologically significant 1,400 mark, South Korean authorities responded by increasing the foreign exchange swap deal limit with the National Pension Service (NPS) from $35 billion to $50 billion.

On Friday, in the Seoul foreign exchange market, the won closed at 1,388.3 per dollar, down 3.6 won from the previous trading day. The won opened at 1,392.0, down by 7.3 won from the previous day, and at one point during the day, it dropped to 1,392.9. Both the intraday and closing prices marked the lowest levels since April 16.

The weakening won is largely attributed to the global strong dollar phenomenon. While Europe has succeeded in controlling inflation to some extent and has consequently lowered its benchmark interest rates, resulting in weaker currency values, the U.S. job market remains robust, supporting expectations of prolonged high interest rates and strengthening the dollar.

In response to the significant drop in the won, foreign exchange authorities have strengthened the swap agreements with the NPS. When the NPS, South Korea’s largest institutional investor, buys dollars in the foreign exchange market for its overseas investments, it can drive up the dollar’s value and further weaken the won. To prevent this, authorities have enhanced exchange agreements, providing dollars directly from the country’s foreign exchange reserves in exchange for won, thus stabilizing exchange rate volatility.

“Considering the continued overseas investments by the National Pension Service, we decided to strengthen the response capacity of both institutions,” the Ministry of Economy and Finance said.

The real value of the won, adjusted for purchasing power, has also declined rapidly. Analysis by the Maeil Business Newspaper, based on data from the Bank for International Settlements (BIS), revealed that the real effective exchange rate of the won has dropped by 1.4 percent this year, ranking it the fifth-largest decline among the 38 OECD countries. The countries experiencing greater currency depreciation than South Korea include Japan (-5.4 percent), Switzerland (-5 percent), and Sweden (-3.6 percent), which have either faced prolonged economic challenges or lowered their benchmark interest rates this year.

The real effective exchange rate (REER) is an indicator that reflects the relative value of a currency, adjusted for inflation and trade weight, showing whether a currency is undervalued compared to others.

In a related development, the U.S. Treasury Department released its semi-annual currency report last Thursday, excluding South Korea from its watchlist of currency manipulators for the second consecutive time since November last year. Meanwhile, seven countries, including China, Japan, Malaysia, Singapore, and Taiwan, remained on the watchlist. The exclusion of South Korea from the U.S. monitoring list is seen as a boost to the credibility of South Korea’s foreign exchange policies, providing greater flexibility for its foreign exchange authorities.