Won-dollar rate opens at 1,555.2, highest since global financial crisis

By Kim Byeo-ri, The Herald Business

The won-dollar exchange rate refuses to retreat despite repeated and forceful verbal intervention by currency authorities. Daytime trading opened Monday at 1,555.2 won, marking the highest level since the global financial crisis.

The rate began the session at 1,555.2 won, up 16.1 won from the previous close, before easing slightly to trade around 1,550 won. Based on the opening price, it is the highest since March 6, 2009 — when the rate stood at 1,590 won during the global financial crisis — a roughly 17-year high.

The won has been under sustained pressure since the Iran war broke out in late February, and repeated verbal warnings from authorities have done little to push it lower. The won has closed above 1,500 won for 14 consecutive trading days — the second-longest such streak on record, surpassed only by the 49 consecutive sessions logged during the foreign exchange crisis of late 1997 to early 1998. The current run has already outlasted the nine consecutive sessions recorded in March and April immediately after the Iran war began, as well as the 11 sessions seen during the global financial crisis in February and March 2009.

The monthly average exchange rate has also climbed sharply. From 1,448.4 won in February — just before the Iran war — it surged to 1,492.5 won in March, dipped slightly to 1,485 won in April, then rose again to 1,491.3 won in May. The June average through Friday stood at 1,522.4 won.

The primary driver of the won's weakness is the Iran war. Oil prices hovering near $100 a barrel and expectations of further US interest rate hikes amid inflation are adding to downward pressure on the currency. Even so, authorities believe the current exchange rate is excessive relative to underlying economic conditions. "Foreign officials are asking why the exchange rate is so high when the Korean economy is doing this well," a senior currency authority official said. "The one-way move is far beyond what economic fundamentals justify."

Authorities have identified speculative trading in the NDF, or non-deliverable forward, market as the primary culprit. Rate gains engineered in that offshore market are feeding broader expectations of further won weakness, amplifying the currency's slide. NDFs are derivatives that settle only the difference between the contracted rate and the spot rate at maturity, without any actual exchange of currency. Because traders need only post a margin deposit, they can take positions worth dozens of times the collateral — giving a relatively small amount of capital an outsized impact on the broader foreign exchange market.

At an emergency market review meeting Sunday chaired by Deputy Prime Minister and Finance Minister Koo Yun-cheol, participants agreed to draw up measures to improve transparency in NDF trading and bring NDF transactions into the domestic foreign exchange market.

The authorities' push to extend domestic foreign exchange market hours to 24 hours — part of a broader "won internationalization" drive — is also aimed at curbing the influence of NDF trading, by pulling opaque offshore transactions onshore and minimizing speculative activity. Whether round-the-clock market access would stabilize the exchange rate immediately is uncertain, however, as thinner late-night trading volumes could amplify price volatility.

At the same time, authorities are expected to continue short-term measures to prevent excessive one-way moves, including smoothing operations and national pension fund foreign exchange swaps. Smoothing operations involve the Bank of Korea selling dollars from its reserves and buying won in the market, while the national pension swap arrangement allows the fund to obtain dollars directly from the central bank.

Because both measures draw on foreign reserves to stabilize the rate, a further decline in reserves is likely. According to the Bank of Korea, foreign reserves fell $880 million from the previous month to $426.99 billion in May as a result of market stabilization measures. Notably, even as overall reserves shrank, cash deposits — a liquid asset — rose $2.59 billion from the prior month, leading some analysts to suggest the authorities were stockpiling additional firepower for future intervention.

Most analysts, however, stress that the current high-exchange-rate environment is fundamentally different from past crises. "During previous financial crises, Korea was a country that faced serious danger when foreign capital fled," said Moon Da-woon, a researcher at Korea Investment & Securities. "Now it is residents voluntarily sending capital abroad to build up overseas assets — and the resulting demand for dollars is what is driving the sharp rise in the exchange rate."

Meanwhile, the Ministry of Economy and Finance and the Bank of Korea issued a joint verbal warning Monday, saying they "judge that, beyond supply-and-demand factors, speculative foreign exchange transactions including NDF trading have been amplifying volatility in the foreign exchange market recently," and that they "will never tolerate excessive volatility and one-directional moves beyond what fundamentals warrant, and will respond forcefully."