South Korea is facing greater volatility in the U.S. dollar-won exchange rate, with uncertainty aggravating the overall economy.
Following the Brexit vote in June, the Korean currency posted a weak position against the dollar, with the greenback closing at 1,182.3 won on June 27 -- the trading session that followed the results of the referendum. Many traders were expecting the won to further depreciate.
However, the local currency reached 1,120.2 won against the dollar on July 29, which is its strongest position so far this year.
About a month after the results of the Brexit vote, the dollar slid by 62.1 won.
Compared to its weakest position at 1,238.8 won on Feb. 25, the local currency gained about 10 percent within less than half a year. It has been showing broader fluctuations between strong and weak positions, going back and forth in a tug-of-war swayed by international crude oil prices and the U.S. dollar.
The recent volatility appears to be confusing different players such as currency dealers, exporters, importers and capital market investors.
Korea’s central bank is also presumed to be troubled by the situation.
Policymakers should be alert to potential negative factors such as China’s possible trade retaliation against Korea in the wake of the U.S.’ deployment of the Terminal High Altitude Area Defense system on the peninsula and the timing of the next rate hike of the U.S. Federal Reserve.
On the Korean bourse, foreigners have vigorously increased their stakes in blue chips like Samsung Electronics, pulling up the KOSPI by about 100 points from the 1,925.24 recorded on June 24. Foreign investors net purchased 4.4 trillion won ($3.9 billion) for the past month.
Market participants are focusing on whether the benchmark stock index, which is hovering at around 2,005-2,025, will break through the psychological upper barrier of 2,100 in the coming months.
A significant point is that foreigners seemingly bet on the won’s steep appreciation shortly after the Brexit poll. Their heavy purchase of local equities with dollar was also a main factor that boosted the won’s value.
There is a high possibility that the won will start losing ground to the greenback when foreigners set out to realize the stock gains after leading the KOSPI rally.
There are also wide predictions that Washington’s Fed will not raise its base rate before the U.S. presidential election on Nov. 8. Some analysts, however, are issuing the feasibility of a hike in September, citing waning Brexit worries in the global economy.
There remain three more gatherings of Fed rate-setters this year: Sept. 20-21, Nov. 1-2 and Dec. 13-14.
For the real economy, the current strong won is frustrating policymakers who are striving to boost sagging exports. The Finance Ministry has allocated extra budget for the year and the Bank of Korea has lowered the benchmark rate to the all-time low of 1.25 percent.
The exchange rate volatility raises concerns as local exporters could see huge losses from the rate’s ups and downs.
The government and the BOK also need to take countermeasures against speculation among economic superpowers involving the U.S. that South Korea is a currency manipulator.
