Bank of Korea Governor Rhee Chang-yong, during his visit to the United States, projected the volatility of the won-dollar exchange rate would ease if the Middle East tension did not escalate further.
The won-dollar exchange rate has been fluctuating heavily over the past few weeks, influenced by the strong demand for the greenback, with the anticipation that the US Federal Reserve will continue its aggressive monetary tightening due to the hotter-than-expected inflation readings.
The strong safe-haven demand for the US dollar evoked by the Iran-Israel conflict also fueled the devaluation of the Korean won.
“If the war does not further expand, there will not be much difficulties in managing the exchange rate,” Rhee said in a press conference held in Washington on Friday. The event was held on the sidelines of the International Monetary Fund and Group of 20 finance leaders’ spring meetings.
“The exchange rate would stabilize as long as oil prices do not surge or incidents such as the shutdown of the Strait of Hormuz do not occur,” Rhee said.
Though the won devaluation lost full steam after the won plunged to its lowest at 1,400 won against the dollar on Tuesday, the local currency lost its value on Friday after Israel’s missile attack on Iran.
The local currency closed against the greenback at 1,382.2 won on Friday, losing its value by 9.3 won from the previous trading day.
But overall, Rhee viewed that the fluctuation of the won-dollar exchange rate has passed its peak.
“The exchange rate has begun to stabilize after we shared a consensus on the excessive depreciation of the won through trilateral talks held by Korea, the US and Japan,” he said, referring to the three-way talks held by finance chiefs of the three nations on Wednesday.
As Rhee said, the won-dollar currency rate closed at 1,372.9 won on Thursday, before stumbling off the next day.
“For countries like Korea, which heavily consume oil, the uncertainty is grave regarding the state of the Middle East,” Rhee said. “Fortunately, the consensus is that the war will not further expand. We will have to watch how it rolls out.”
With the heavy fluctuation of the won-dollar exchange rate, the won’s value deprecated by over 7 percent in nearly four months, compared to how the rate stood in the 1,280 won range in late December.
The devaluation is sharper than the 6.9 percent and 5.8 percent depreciation in the same periods of 2008 and 2009, when Korea was impacted by the global financial crisis.
Though the volatility in the exchange rate is caused mainly by the strong dollar, the depreciation of the Korean won is also a factor.
The US dollar index, a metric of the dollar value against major six peers such as the euro, pound and yen, rose 4.9 percent this year, outweighing the 7.3 percent devaluation of the won against the dollar. The figures show the Korean won has lost its own value.
The won’s devaluation partly results from the depreciation of the Chinese yuan and Japanese yen, as the won works as a proxy for the two currencies.
“The upper band of the won-dollar exchange rate has been confirmed when it reached its peak at 1,400 won, as Korea, the US and Japan engaged in policy cooperation,” Daishin Securities Economist Lee Joo-won viewed.
“If the Iran-Israel conflict does not expand, the inflationary pressure will weaken in the second half of this year,” Lee said. “The eased uncertainty of (the US Fed’s) monetary policy will contribute to the transition of the dollar-won exchange rate.”
