Won weakens past 1500 per dollar again amid market volatility; BOK governor sees room for strengthening

The South Korean won's unstable performance continued, with the exchange rate against the U.S. dollar climbing back above the 1500 mark after just one day. On Friday, the won-dollar exchange rate closed at 1506.1 won, up 7.6 won from the previous day's close of 1498.5 won. This marks a return above the 1500 threshold, which the currency had fallen below for the first time since May 14.

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There is considerable room for the won to turn towards strengthening (a fall in the exchange rate) as the current account surplus is accumulating significantly.

The currency's weakness is being fueled by a combination of factors. Renewed tensions between the United States and Iran have heightened global uncertainty. Additionally, the release of the Federal Open Market Committee (FOMC) meeting minutes has reignited concerns about potential U.S. interest rate hikes, diminishing hopes for the won to stabilize in the 1400s.

Despite these pressures, the won's gains were somewhat limited, with the exchange rate fluctuating mainly in the low 1500s. This resilience is partly due to ongoing cooperation between South Korean and Japanese financial authorities to stabilize the market. Expectations surrounding SK Hynix's impending issuance of American Depositary Receipts (ADRs) also provided some support.

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The dollar is strengthening due to changes in U.S. monetary policy (interest rate hikes). Domestically, there are also factors of portfolio rebalancing (by foreign investors). While supply and demand are important determinants in the short term, I believe there are also long-term fundamentals.

Bank of Korea Governor Shin Hyun-song addressed the situation, stating that the won has considerable room to strengthen due to a large accumulated current account surplus. He attributed the recent rise in the exchange rate to dollar strength driven by potential changes in U.S. monetary policy and portfolio rebalancing by foreign investors. Shin emphasized that while short-term supply and demand are crucial, the won's long-term fundamentals, including the current account surplus, suggest the current exchange rate is excessive.

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Foreign investors are continuing to sell because Korean stock prices have risen significantly, and they are reducing their holdings. I expect this selling by foreign investors to subside in the latter half of the year.