Won strengthens as U.S. Treasury flags 'excessive volatility'

The South Korean won is on a downward trend against the U.S. dollar, a move that analysts suggest is influenced by a combination of factors including easing geopolitical tensions in the Middle East and falling international oil prices. The issuance of American Depositary Receipts (ADRs) by SK Hynix is also injecting dollars into the market, while coordinated efforts by South Korean, U.S., and Japanese foreign exchange authorities appear to be playing a role.

Adding to these dynamics are recent comments from U.S. Treasury Secretary Scott Bessent. In a CNBC interview, Bessent noted that "excessive volatility" in the South Korean won had been observed, alongside concerns about the undervaluation of the Chinese yuan. While discussing the U.S. and Japanese authorities' market interventions to support the yen, Bessent's remarks on the won's fluctuations could signal a potential increase in intervention intensity, further contributing to the won's strengthening.

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We have seen excessive volatility in the Korean won, and I believe the Chinese yuan is also undervalued.

One analysis suggests that the U.S. interest in stabilizing the won's value stems from concerns that a weaker won could complicate South Korea's commitment to invest $350 billion in the U.S., as agreed upon during last year's tariff negotiations. The agreement included a clause allowing South Korea to request adjustments to investment amounts and timelines if the won's volatility posed a risk.

However, the long-term stability of the won's appreciation remains uncertain. The inflow of dollars from SK Hynix's ADR issuance is expected to conclude by late August. Furthermore, the volatile nature of Middle East tensions and international oil prices continues to present a variable factor. The effectiveness of U.S.-Japan cooperation in defending the yen's value is also being questioned, with some analysts believing that sporadic interventions alone are insufficient to alter the yen's structural weakness.

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It is difficult to change the yen's structural weakness through one-off (or sporadic) interventions through international cooperation.