Won-dollar rate climbs back above 1,380 — will it keep rising?

The won-dollar exchange rate has climbed back toward the 1,400-won threshold this month, pushed higher by surging oil prices and a US interest rate increase. With strong export momentum still supporting the won, analysts warn that volatility in the exchange rate is likely to increase.

The weekly closing rate on the Seoul foreign exchange market stood at 1,382.2 won per dollar on Thursday — the first time the weekly close has exceeded 1,380 won since Aug. 27, when it closed at 1,380.9 won, according to the Bank of Korea. As of 9 a.m. Friday, the rate had edged down to 1,380.1 won.

The monthly average won-dollar rate peaked at 1,528 won in June before falling consecutively to 1,488.9 won in July and 1,404.4 won in August, driven by growing demand from exporters to convert foreign earnings into won. Since Sept. 9, when the rate touched 1,336.1 won, it has risen for six consecutive trading sessions through Thursday.

On an intraday basis, the rate reached a high of 1,388.2 won on Thursday, approaching 1,390 won — the highest intraday level since Aug. 26, when it hit 1,388.3 won.

The recent reversal reflects renewed tensions between the United States and Iran, which sent international oil prices sharply higher, compounded by the US Federal Reserve raising its benchmark interest rate by 0.25 percentage points on Thursday — its first hike in about three years — which widened the interest rate gap between the two countries.

Dubai crude prices surged 28.1 percent in just 15 days, jumping from $99.9 per barrel on Sept. 1 to $128 on Wednesday, according to the Korea National Oil Corporation. Over the same period, Brent crude and West Texas Intermediate rose 11.7 percent and 13.5 percent, respectively. South Korea imports more than half of its crude oil from the Middle East, meaning the impact of rising global oil prices flows directly through to the domestic economy.

The Federal Reserve's Federal Open Market Committee raised its benchmark interest rate by 0.25 percentage points — its first increase in about three years — widening the Korea-US rate gap from 0.75 percentage points to 1 percentage point. A wider rate differential puts upward pressure on the exchange rate, as a higher US rate strengthens the dollar and leaves the won relatively weaker.

The dollar index, which measures the greenback's average value against six major world currencies, rose 0.6 points from 99.7 on Sept. 1 to 100.3 on Thursday.

If high oil prices and global inflation persist, upward pressure on the won-dollar rate is expected to continue.

On the other hand, a record current-account surplus and the resulting demand from exporters to convert dollar earnings into won are seen as factors that could brake further exchange rate gains.

Moon Da-un, a researcher at Korea Investment & Securities, said the Fed has raised rates and is expected to raise them further, while persistently high oil prices are adding to dollar-strengthening pressure. "Given the current external environment, upward pressure on the exchange rate is likely to remain elevated until the US midterm elections in early November," Moon said, and went on to say that once strong-dollar pressure eases, domestic conditions will again push the exchange rate lower.

A senior Bank of Korea official said that, taking into account recent current-account performance and other domestic fundamentals, the exchange rate is expected to fall on a trend basis.