Even Record Earnings from Samsung and SK Hynix Can’t Strengthen the Won… How High Will the Soaring Exchange Rate Go? [Weekend Money]

Yonhap News Agency

View original image

Will the Korean won strengthen if exports perform well? Textbook economics says yes. When Korean companies sell goods overseas and earn dollars, the domestic supply of dollars increases, which can raise the value of the won. In particular, if semiconductor exports recover and the current account surplus grows, it is natural for the won-dollar exchange rate to decline.

However, the foreign exchange market these days is not moving according to the textbook. Semiconductor exports are strong, and the current account surplus is at a record level, yet the won-dollar exchange rate continues to remain high. The hawkish stance of U.S. Federal Reserve (Fed) officials and the robust U.S. economy are driving a strong dollar for the time being. In addition, as private sector overseas asset accumulation increases, the weak won trend is persisting.

On June 26, Hana Securities forecast that due to these factors, upward pressure on the won-dollar exchange rate will likely dominate for the time being. Although the won is already undervalued, the forces pushing the exchange rate higher are judged to be stronger than those pulling it down.

The biggest variable is the United States. First, the Fed’s hawkish outlook is a burden. The Fed reform project led by new Chair Kevin Warsh is expected to take shape around the end of the year, but Fed officials are currently focusing on rising inflationary pressures and the need for rate hikes. As a result, market vigilance regarding rate hikes in the second half of the year is inevitably increasing. The interest rate futures market is even pricing in the possibility of two rate hikes in the U.S.—one in September this year and another in March next year.

View original image

The U.S. economy is also relatively strong. While economic sentiment in the eurozone is weakening, the U.S. manufacturing and services Purchasing Managers’ Indices (PMI) remained in expansionary territory in June. Other major central banks, such as the European Central Bank (ECB) and the Bank of Japan (BOJ), may also move toward tightening in the second half, but the extent of rate hikes in countries without solid economic growth is likely to be limited. Ultimately, some analysts say the direction of the dollar will only change if the Fed officials show a more dovish tone.

Why, then, is Korea’s record current account surplus not pulling the exchange rate down? Jun Kyuyoun, an economist at Hana Securities, pointed out that the won is excessively undervalued when considering this year’s depreciation against major currencies and the real effective exchange rate. Despite strong semiconductor exports and the largest-ever current account surplus, the won-dollar exchange rate is rising because capital outflows through the financial account are even greater. Jun explained, “In the past, a significant portion of the current account surplus led to an increase in central bank reserves, but since the financial crisis, private overseas asset accumulation has increased through direct and portfolio investment. Given the structural pressure of dollar outflows, such as Korea Investment Corporation’s investments in the U.S., joint efforts by both countries—such as signing a currency swap agreement—are needed to stabilize the exchange rate.”

View original image

Given these factors, the short-term outlook for the won-dollar exchange rate remains to the upside. Continued net selling of Korean stocks by foreign investors is also lowering the likelihood of a drop in the exchange rate. However, investors’ perception is approaching a peak. Jun noted, “With the current won-dollar exchange rate approaching the financial crisis peak of 1,597 won, the perception that 1,560 won is the top will likely grow.” He added, “Concerns about government intervention and the possibility of the Japanese government intervening in the foreign exchange market may also help stabilize the exchange rate.”

© The Asia Business Daily. All rights reserved. Unauthorized AI training and use prohibited.