The South Korean currency’s sharp drop Tuesday triggered a flurry of warnings and statements from financial authorities, which helped stabilized the won to some extent in the following two sessions. But vigilant monitoring is in order as volatility may not fade out soon.
It was a resounding red flag that the Korean won weakened to hit the psychologically important 1,400 won per dollar during an intraday trading Tuesday, affected by the sales of more assets by foreign investors here, the escalating Middle East conflict, the outlook that the US Federal Reserve would keep the restrictive monetary policy longer than expected.
Authorities were duly alarmed as the Korean currency hit the alarming 1,400 won level before ending down at 1,394.5 won per dollar Tuesday, the weakest level in 17 months. The Korean won had touched the 1,400 won level only three times until Tuesday: during the global rate hike trend led by the US Fed in 2022, the global financial crisis in 2007-08 and the Asian financial crisis in 1997-98.
Although the Korean currency regained its value Wednesday to close at 1,386.8 won and further recovered Thursday to end at 1,372.9 won, experts warn about the overall weakening of the local currency in the coming months -- a negative outlook for Korea’s government officials already struggling with rising consumer prices and high energy prices.
But there were some positive developments aimed at countering the continued slide of the Korean currency. On Wednesday in Washington, the finance chiefs of South Korea, the US and Japan addressed the sharp depreciation of the Korean won and Japanese yen during their first trilateral talks.
Korea’s Finance Minister Choi Sang-mok, US Treasury Secretary Janet Yellen and Japan’s Finance Minister Shunichi Suzuki issued a joint statement: “We will also continue to consult closely on foreign exchange market developments in line with our existing G20 commitments while acknowledging serious concerns of Japan and the Republic of Korea about the recent sharp depreciation of the Japanese yen and the Korean won.”
The strong signal from the three countries helped calm the jittery sentiment of financial market players, a much-needed move to bring back stability to the volatile foreign exchange markets in Seoul and Tokyo.
One day before the trilateral talk, Choi and Suzuki met on the sidelines of the G20 Finance Ministers and Central Bank Governors Meeting in Washington and expressed their intention to “take appropriate actions against excessive moment,” sharing their concerns about the recent depreciation of their currencies against the US dollar.
In addition to the two verbal interventions, the Bank of Korea Gov. Rhee Chang-yong, who was also in Washington to attend the IMF International Conference, gave his helping hand Tuesday by saying that the Korean won is “slightly off the level that is acceptable by the market fundamentals.” Rhee added the central bank has resources and tools to soften the volatility of the Korean currency against the US dollar.
Rhee’s Tuesday comment came a day after he said the sharp depreciation of the Korean currency is “excessive” and the central bank is ready to take steps to stabilize the foreign exchange market in an interview with CNBC.
But it is too early to stop worrying about the Korean currency. Major currencies are weakening against the US dollar amid the heightened geopolitical risks in the Middle East and other negative factors, but the Korean won is suffering a particularly drastic decline in value compared with other Asian currencies. According to Korea Investment & Securities, a brokerage, the won depreciated by as much as 1.8 percent against the US dollar in the first 12 days of this month, compared with the Chinese yuan (-0.1 percent), the euro (-0.9 percent) and the Japanese yen (-1 percent).
Given the Korean won’s higher volatility reflects the ongoing concerns about the Korean economy, both the government and the financial authorities must take more aggressive measures to handle risk factors while stepping up the monitoring of the foreign exchange market.
