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Uncertainty over FOMC and weakening of euro and yen behind strong greenback
By Anna J. Park
The Korean won's weakness against the greenback is expected to continue for the time being, despite foreign exchange authorities' strong willingness to intervene in the market, as experts view necessary momentum to shift the current tide is lacking. On Tuesday, the won-dollar exchange rate ended at 1,267.8 won per dollar at Seoul's foreign exchange market, up 2.7 won from the previous trading session, amid the market's strengthened anxiety over the upcoming U.S. Fed's Open Market Committee (FOMC).
As the FOMC this week is expected to take a "giant step," or a 0.75 percentage point increase of the key interest rate, the market's preference for safe assets, including the dollar, has only strengthened more.
The recent surge of the won-dollar rate is triggering concern as it has not reached the 1,300 won mark since the 2008 global financial crisis. However, if one looks into Korea's economic fundamentals, it is questionable whether the economy, which has performed relatively well despite the pandemic, deserves such a steep weakening of the local currency.
Analysts thus say the rising won-dollar rate reflects a global strengthening of the dollar rather than Korea's economic fundamentals, pointing to an even steeper weakening of other key currencies like the euro and the Japanese yen. While the value of the euro against the dollar fell to a five-year low at the end of last month, the yen-dollar exchange rate had also recently touched a 20-year high, breaking the 130 yen mark per dollar. The relative weakening of the euro and the yen against the dollar is partly attributed to the monetary-easing policies by the central banks in Japan and Europe, as well as mounting geopolitical concerns which further stoke the dollar's appreciation.
While the government is voicing its willingness to intervene in the market, if the exchange rate market becomes too volatile, it doesn't seem the foreign exchange authorities' determination alone is enough to curb the global trend of the strengthening dollar. The local authorities' remarks that the recent overshooting is excessive temporarily lowered the soaring won-dollar exchange rate during last Friday's trading session, yet the exchange rate rose again on Monday and on Tuesday.
Experts forecast the won's value could somewhat appreciate compared to the present if the uncertainty and anxiety surrounding the FOMC is resolved in the near future. Yet, they agree that there exist no clear momentum for the Korean won's strengthening under the current global macroeconomic conditions. Foreign investors' selling spree of Korean stocks this year, in addition to the country's monthly trade deficits for two straight months, all add to the Korean won's weakening against the dollar.
"As the global market's speculative net-buying positions for the U.S. dollar are continuing, amid the weakening of major key currencies as well as the preference for safe assets over concerns of an economic recession, the won-dollar exchange rate is not expected to go down by a big margin," Lee Da-eun, an analyst at Daishin Securities, said.
Park Sang-hyun, an economist at HI Investment & Securities, also points out the need to closely watch the yuan's trend.
"Whether the yuan recovers its value against the dollar, following the Chinese government's strong determination to boost the economy, will be one of the key factors affecting the won-dollar exchange rate," Park said.
