The won-dollar exchange rate of 1,200 won served as a litmus test paper showing the crisis in the Korean economy. In the past, when the global financial crisis broke out, the exchange rate went up to 1,200 won. However, the fundamental indicators of the Korean economy are among the best since 2008. However, the situation surrounding Korea, including changes in US central bank (Fed) monetary policy, concerns about global inflation, and the shaky Chinese economy, is more severe than ever. As uncertainty grows, companies do not release the dollar to the market as much as they do, encouraging the dollar to rise. Analysts say that as these risks overlap, the exchange rate will soar to 1,250 won.
According to the Bank of Korea on the 13th, the average won-dollar exchange rate from January 1, 2008 to today, right after the global financial crisis, was 1137 won. The lowest price during this period was 935 won and 70 won per dollar recorded on January 15, 2008, before the global financial crisis. The highest price was 1570 won 30 on March 2, 2009, in the midst of the financial crisis.
The borderline of the crisis was usually accepted as the exchange rate of 1,200 won. The break above 1,200 won occurred from September 2008 to September 2009 when the global financial crisis hit the world, January to May 2010 when the European financial crisis hit the world, and 2015, before and after the People’s Bank of China devalued the yuan abruptly. From September to December 2016, the exchange rate exceeded 1,200 won. Recently, the trade dispute between the United States and China and Japan’s export restrictions overlapped in August and October 2019, and the Corona 19 crisis spread in February and July last year.
The previous day’s exchange rate closed at 1,198 won and 80, well above the average exchange rate. During the morning, the exchange rate soared to 1200 won and 40 won. It is expected to hover around 1,190 won to 1,200 won on this day as well, as the government intervenes and foreigners are tug-of-war. Park Sang-hyeon, a researcher at Hi Investment & Securities, said, “In the past, the exchange rate of 1,200 won was not easy to break through enough to be considered an ‘excessive wall’ (a wall that cannot be crossed). It could break through,” he said. Ahn Young-jin, a researcher at SK Securities, said, “The strong dollar will continue in the fourth quarter,” and “I am skeptical that the exchange rate will rise further.”
The won-dollar exchange rate usually shows a trend similar to that of the Korean real economy. This is because, as the fundamentals of the Korean economy improve, the demand for won exchange to purchase Korean assets increases.
However, unlike the exchange rate approaching 1,200 won, which is the level of the global financial crisis and the Corona 19 crisis, Korea’s real economy has entered a stable trajectory. The current account, which is considered a key fundamental indicator of Korea’s ‘export-led economy’, continued its surplus for 16 consecutive months until August ($7.5 billion). Exports from the 1st to the 10th of this month increased by 63.5% compared to the same period last year to record $15.2 billion, and recent export indicators were also solid. The amount of foreign exchange reserves, known as the ‘foreign breakwater’, reached $463.97 billion at the end of September, breaking a record high for three consecutive months since the end of July.
There are three main reasons why the won-dollar exchange rate soars, unlike its strong foundation. First of all, the expectation that the Fed will tighten the money line is reflected in expectations. Inflation concerns are growing, with West Texas Intermediate (WTI) rising above $80 a barrel, and US employment indicators are improving. The number of job postings for August in the US announced on the 12th (local time) was 10.43 million, the second highest in history, following the previous record high of 11.09 million. If the Fed tapers, liquidity pours into the market and the dollar depreciates accordingly.
China’s Hengda Group, a real estate development company, is facing the deepening crisis of bankruptcy and the assessment that China’s growth rate will decline this year, which is experiencing the worst power shortage, is also acting as a variable to boost the exchange rate. Global investment banks (IBs) lowered China’s growth rate one after another to reflect the power shortage. Goldman Sachs fell from 8.2% to 7.8% and Nomura Securities fell from 8.2% to 7.7%, respectively. As China is Korea’s largest export market, the two countries’ economies are highly correlated and exchange rates move similarly. Analysts say that as the real economy in China fluctuates, the value of the won is also fluctuating.
There is also an analysis that companies are accumulating dollars in safe deposit boxes rather than releasing them in the market. In August, corporate dollar deposits reached 63.19 billion dollars, an increase of 940 million dollars from the previous month.
Analysts say that as companies have good KRW cash-generating capacity, the demand for funds to convert dollars into KRW has also decreased. Here, it is evaluated that the supply of dollars to shipbuilders, which played a key role in the foreign exchange market in Seoul, has decreased. Analysts say that shipbuilders are adjusting their order volume as ship orders are increasing and the target of this year is achieved early in the first half of the year to the third quarter.
By Kim Ik-hwan, staff reporter [email protected]