Won Falls to Lowest Since Mideast War Amid KOSPI Surge

The recent dip in the won-dollar exchange rate, hitting its lowest since the escalation of Middle East tensions, is a welcome development for the Korean economy. The KOSPI's historic surge past 7,000 points, coupled with a robust inflow of foreign capital, has provided a much-needed boost, driving the currency's appreciation.

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The domestic stock market's upward trend is strong and foreign investment is flowing in, so (the won-dollar exchange rate) is expected to show a downward trend. However, for this trend to lead to a further decline, the Middle East issue must be resolved.

While this trend offers some relief, it's crucial to acknowledge that the exchange rate, though lower, still hovers in the high 1400s, well above the government's budgeted 1380 won per dollar. This persistent strength of the dollar against the won underscores the ongoing economic pressures and the need for continued vigilance. The significant drawdown in foreign exchange reserves, nearly $4 billion in March alone, highlights the extent of the central bank's efforts to stabilize the currency.

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The exchange rate is expected to gradually decline in a 'high first half, low second half' trajectory. This is because the higher-than-expected domestic growth rate and base rate are increasing downward pressure on the exchange rate.

Analysts suggest that while the current market momentum favors a continued downward trend for the won-dollar rate, a lasting resolution of the Middle East conflict is a prerequisite for a more substantial decline. The influx of foreign investment, driven by the bullish stock market, has increased dollar supply, but the overall outlook remains cautious. From a Korean perspective, the strength of our export performance and higher-than-expected economic growth are fundamental factors supporting a gradual depreciation of the won in the medium to long term. This contrasts with a Western view that might focus solely on geopolitical risks, overlooking the underlying economic resilience that Korea is demonstrating.

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Many foreigners I met asked why the exchange rate is so high when Korea has high growth, a significant current account surplus, good exports, and relatively stable prices. While I couldn't give a precise answer, it's a fact that it's high compared to the past when looking at fundamentals like current account surplus, price level, and growth rate.